Purchase orders help small businesses maintain accurate records and clarify order details and pricing agreements with your company’s suppliers, sellers, and service providers.
In this article, we’ll clearly define a purchase order (PO) and help you better understand the purpose and benefits of POs. Then, we’ll reveal how to create a purchase order and the differences between work orders, supply orders, and purchase orders.
What is a purchase order?
A purchase order, or a PO, is an official, legally-binding document that a buyer submits to a seller, vendor, or service provider. This purchase order allows the seller to review the entirety of the buyer’s order—including quantity, price, delivery details, and invoice payment terms.
While a purchase requisition also provides these details, a purchase order is an actual, enforceable contract. Once the buyer submits the PO, they’re agreeing to pay for all the goods and services (and any additional fees) outlined in the document.
What is the purpose of a purchase order?
A purchase order is important to small businesses for a variety of reasons. Some of the essential factors include clarifying order details, creating a contract for payment, reminding vendors exactly how to invoice you, speeding up accounting audits, and reducing human error.
Here’s a little bit more about each of these benefits.
1. Clarify order details
A purchase order articulates precisely what a buyer has agreed to purchase from a vendor, supplier, or service provider.
If you’re the recipient of a PO, keep in mind that once you receive a PO, the time to negotiate has passed—because a PO is a legally binding contract. That being said, if you spot an error on a purchase order, you should absolutely inform your client or customer.
If you’re the one creating a purchase order, you should double-check your purchase orders to ensure they match approved estimates and are accurate and error-free.
Related: How to choose a supplier
2. Create a legally binding contract
As we’ve mentioned, a PO is an official contract enforceable by law. This matters because most buyers do not pay on receipt and instead rely on more favorable, delayed invoice payment terms.
Fortunately for sellers, a PO creates real protection since the document ensures they’ll be paid per the terms listed on the purchase order. And if for some reason payment to the seller is withheld, the PO provides grounds for legal action.
3. Remind vendors how to invoice you
A purchase order also provides your sellers explicit instructions on how to invoice you.
In fact, many businesses will not accept an invoice without a PO number on it. This allows your accounting team to quickly cross-reference all bills—a crucial step if your accounting team is removed from the daily ins and outs of your business.
4. Speed up accounting audits
Creating purchase orders increases transparency between buyers and sellers. And it also saves your accountant tons of time too. That’s because accountants can instantly link purchase orders to invoices, seamlessly ensuring that payment for the right products and services are going to the right vendors at the right time.
Related: What is Supplier Relationship Management?
5. Reduce human error
Finally, purchase orders are a good business practice that helps reduce human error all around. When your company creates purchase orders, and your vendors reference them during billing, you’re much less likely to overpay or underpay your suppliers accidentally.
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How to create a purchase order
Creating a purchase order might seem intimidating, but the process is actually quite simple. And there are no elaborate forms required either; a purchase order can be a straightforward typed document with a few key pieces of information.
What’s most important is that your PO contains all the information necessary. Here’s what your purchase order should include:
- Name and address of vendor, seller, or service provider
- A unique PO number
- PO date
- Delivery and billing addresses
- List of goods and services to be purchased
- List of agreed-upon prices and fees
- Detailed payment terms, including any discounts, late fees, or financing charges
You may also include delivery details, contact information, and legal disclaimers on your purchase order.
Once you create your purchase order, you should review it closely for any errors, then submit it to your vendor right away. Many vendors will not begin work until you submit your PO—usually because a PO offers legal protection should you fail to pay them on time.
Work order vs. purchase order
Although work orders and purchase orders sound the same, the terms aren’t interchangeable. A work order is created when a task or job is assigned to a person or a team—like a request to repair a broken air conditioner.
On the other hand, a purchase order is an official contract a buyer sends to a seller to confirm how much they will pay for goods or services.
Supply order vs. purchase order
A supply order helps businesses keep track of the many orders for supplies they place. By creating a template for supply orders, companies can keep better track of what they’re buying, what they’re spending, and which teams or employees might not be ordering or budgeting properly.
On the other hand, a purchase order is an official document that articulates exactly what a buyer is purchasing from a vendor—and for how much.
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