Figuring out the puzzle of Purchase Orders – how do they work?

Written by Lauren Lovett

It’s often not a topic a busy CEO wants to talk about, but purchase orders play a very real and crucial role in a business. Specifically when a purchase is made and a paper trail is required. We all know we have to use them. What we often don’t know is why or how to implement a system that works.

‘Implementing a purchase order system can be useful for both parties,says Clive Lewis of the Institute of Chartered Accountants & Wales,as it helps the customer minimise the risk of incorrect payments by ensuring that deliveries and invoices have a corresponding purchase order number, while suppliers have proof that goods and services were ordered.

Purchase orders are legal contracts. Provided as a guarantee or ‘insurance’, to protect the supplier who is providing goods before payment. Along with legal protection, it’s also significant for inventory management and payment tracking. It's a great function for monitoring cash flow and credit control. Then, for the buyer, it’s a critical piece of information to monitor delivery and receipt of your items.

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How does the Purchase Order process work?

Submission

The buyer prepares a purchase order. If your organisation is big enough, then this usually happens within the purchasing department (but for small businesses that is quite the luxury!) Online applications (such as Turbine) simplify this process for both small and big businesses alike.

Applications take all the hassle out of the PO process, as they usually have fields for all the critical information, which you simply have to fill out prior to processing and sending. The software then generates a PO number for you to use. Simple really, right?

Processing

Once an order is submitted, the purchase is created and generally deemed as ‘in-progress’. The order then remains in-progress until the buyer has received the ordered items or services. The corresponding PO is then marked as ‘requiring payment’ once the order has been received.

It is at this point that the buyer then completes their responsibility for the purchase and pays. To ensure the payment is accurate, the buyer prepares an invoice and quotes the same PO number to ensure both transactions match up.

How is a Purchase Order different from an Invoice?

Buyers draft purchase orders. Sellers, on the other hand, prepare invoices. For more information on the difference between a purchase order and an invoice, check out our blog post here.

Make purchase orders work for you

The moral of this story is simple: all businesses NEED purchase orders, and to make it work as well as possible, you need a super simple system (try saying that 3 times backwards!) Perhaps you want to start off with a clean and clear spreadsheet to track all of the information, but pretty quickly a spreadsheet isn’t going to cut it.

Implementing an automated system from the start will save you time, money and unnecessary mistakes.

Shameless plug coming up... Turbine is a system that was built with one promise at its core: to help save your business money. So, can we help you?

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Cut costs , Finance , Purchases , Purchasing , Technology