Purchase Order (PO)

Purchase orders and invoices are commonly used documents in the procurement process. For business owners, it is important to establish proper processes for tracking inventory, ordering supplies, and managing requisitions. Purchase orders play an important role in the procurement process.

In this section, we’ll cover what a purchase order is, how it works, and how it’s different from an invoice. 

What is a Purchase Order (PO)?

A purchase order is an official, legally binding document that’s issued by a buyer and sent to a vendor. It contains a list of the items that the buyer wants to buy, including quantities, payment terms, and specific delivery details. 

Purchase orders are issued by a company’s purchasing division. It is simply defined as the contract that the buyer drafts, stating their commitment to pay for specific services or goods that are to be delivered in the future. 

Purchase orders contain several key elements, including:

• The goods or services required
• Quantities required
• Specific SKUs or brand names
• Price per unit (often quoted by vendors)
• Required delivery date 
• Location of delivery
• Payment terms 
• Billing address
• A unique PO number

Other information, such as any discounts applied, can also be stated on the purchase order for greater clarity.

Vendors often use purchase orders to provide credit to buyers, without assuming any risk, since the purchase order offers legal protection. There are different kinds of purchase orders, though standard purchase orders and blanket purchase orders are the most common choices. 

The former is used for covering specific purchases that are unlikely to reoccur. The latter is used for making ongoing purchases until the limits are met, or as defined by the terms of the contract. 

How Are Purchase Orders Issued?

Purchase orders greatly streamline the procurement process. Here’s the workflow that leads to a purchase order being issued:

1. Employees or key executives file a requisition form with the purchasing department for specific goods or services they require.
2. The purchasing department verifies the requisition. 
3. They issue a PO to the vendor, often electronically. 
4. The seller acknowledges the receipt of the purchase order, and confirms whether they can fulfill the order. 
5. The seller then prepares the goods for shipment or aligns necessary resources for required services
6. The order is shipped, and the PO number is attached on the shipment list. 
7. The seller then submits an invoice, using the same PO number to simplify the matching process.
8. Since the PO is already preapproved, the AP department approves and clears the invoice. 

In larger entities, purchase orders are often the second step in the procurement process, with the requisition form being the first one. 

How Are Purchase Orders Different from Invoices?

Many people tend to confuse purchase orders with invoices. There is a connection between the two: purchase orders are often used as a reference when issuing invoices. But purchase orders and invoices are issued at different stages in the procurement process, and are used by different people. 

Purchase orders are created by the buyers, or the business that needs goods or services. They are created before the purchase of goods, and specify the company’s requirements. Purchase orders also include payment details. 

Invoices, on the other hand, are created by vendors selling the goods. Invoices are often issued after purchase and are also used to confirm the delivery of goods. And, invoices generally require payment on a particular date. 

Benefits of Using Purchase Orders

Businesses use purchase orders for a variety of reasons. Here are some of the key benefits of using purchase orders. 

• Improved financial accuracy. Purchase orders improve fiscal accuracy as goods are only purchased after verification.
• Improved budgeting. Purchase orders help businesses improve budgeting, since the purchase department verifies whether funds are available before a PO is issued in most cases.
• Quicker delivery. The purchase order includes the required date of delivery, which is often aligned with the buyer’s requirements. 
• Improved visibility of AP processes. Purchase orders allow finance leaders greater insight into the performance of their AP processes, and bolsters compliance with 2-way or 3-way matching. 

However, purchase orders are not always a suitable choice for smaller purchases, as they increase the amount of paperwork required. In certain situations, procurement cards are a better choice. 

Why Digitize Purchase Orders?

For smaller businesses, where the number of purchases are low, managing POs manually is fairly simple. However, as your business continues to grow, the number of purchase orders will increase automatically. This dramatically increases potential for error, which is why it’s best to switch to an automated solution. 

SoftCo Procure-to-Pay automates your entire finance process, eliminating manual or duplicate processes and offer greater visibility over all purchase orders or outstanding invoices. There are many reasons why automating procure-to-pay business processes is important apart from the increased ROI it generates.