A sluggish purchase process can significantly impede your business's performance within the contemporary competitive global landscape. Outdated systems and manual purchase order processing hinder your purchase order process, leading to more drawbacks than benefits, largely due to the time required for purchase order revisions. This article provides a comprehensive understanding of the purchase order process and the steps you should undertake to execute a purchase order, all supported by efficient purchasing software.
What Is A PO Processing?
Before we dig into PO processing, let's begin from understanding a purchase order.
So, what’s a purchase order? It is a document confirming that you’ve authorized transactions for the purchase of designated goods and services from a seller. A purchase order is an official document that legally binds you and the vendor to a specific transaction.
A purchase order goes through different stages from its creation to the vendor’s acceptances. These stages for the purchase order process.
What Information Should You Include In The Purchase Order?
The essence of a purchase order is embedded in the clear guidelines and instructions that it gives the vendor concerning the purchase. It also serves as the legal proof bearing the details of your agreement with the vendor during the purchase. A purchase order prevents cases of miscommunication during transactions and carries the following information;
- Name of the company or individual buying the goods or services
- Your contact information
- Order placement and delivery dates including timelines
- Agreed prices of the goods or services purchased
- Description of the goods or services
- Payment conditions and terms
- Purchase order (PO) number
- Invoice address
Why Do Companies Need Purchase Orders?
The purchase has its benefits whether you’re a vendor or a buyer. Here is a summary of the reasons why you need a PO.
- If you’ve a vendor, the PO helps you to understand the order requirements simplifying the process of fulfilling an order without miscommunication
- Buyers a purchase order to cross-verify that they have received all the goods and services as ordered.
- You can also use a purchase order as an official document for legal recourse if the vendor failed to honor the agreement.
- The business can use purchase order management as a tool of keeping track of all purchases for more efficient management of budgeting and inventory
The Purchase Order Steps
The purchase order is divided into six main steps as follows;
The first step before generating a purchase is creating and approval of an internal requisition. You’re not ordering anything at this stage but seeking the budget holder’s thumbs up to go on with your purchase plans. Relevant teams within your company must approve the requisition before the PO process.
Creation And Issuance Of Purchase Order
The department responsible for purchases starts communication with the sellers to agree on the terms and specifications of the goods and services including the description and payment terms. Most businesses use purchase order software for efficient electronic submission and tracking of purchase orders. The Company creates a purchase order bearing all the details that you’ve agreed upon.
The vendor reviews the submitted PO to ascertain that it captures all the details such as quantities, delivery due date, pricing, total due amount, and other details abide by the agreement. The vendor accepts the purchase order using procurement software if everything is in place.
The vendor goes on to prepare the delivery of the goods or services upon the purchase order approval. Vendors flag the PO and send it back to the company if there are any concerns or the item is out of stock.
Recording The Purchase
One of the primary reasons for following PO processing is streamlining purchases. As a buyer, it’s important to file or record the PO for future purposes such as auditing.
Dispatch And Delivery
The vendor delivers the ordered goods and the company checks whether they meet the specifications discussed including quality and quantity. You may reach the vendor if the goods are substandard or have any shortcomings.
What’s The Difference Between A Purchase Order And An Invoice?
Invoices and purchase orders seem similar but they have undercutting differences. The main difference is that a buyer sends the purchase order whereas the vendor sends the invoice. The seller creates an invoice upon receiving a purchase order and it contains information such as;
- Seller’s contact information
- Discounts and credits, if any
- Payment schedules
- Total amount due
Why Do You Need Purchase Order Automation For Your Business?
A PO process without a purchase order system is manual and time consuming. Implementing purchase order management software helps you to manage purchase requests effectively. AP automation has the following benefits to your business;
- Faster approvals
- Simplifies the process of creating and sharing purchase orders
- Procurement software offers insights into your spending analytics
- You have the order status at glance
- Simplifies your cash flow management
The PO processing is essential for your company’s supply chain management. Besides, the automation of PO process makes purchase inventory quick and efficient.