Purchase orders by themselves can be confusing enough. But, they’re not as daunting as you may think, and understanding the differences between them could save your business time, money and legal headaches.
Purchase orders: a review
Before learning about the different kinds of purchase orders (POs), it’s helpful to remind yourself what they do, and why.
Put simply, a purchase order is created by a buyer and sent to a seller to authorise and document payment for services. They’re used to set clear terms for a transaction before it happens, ensuring good conduct on both sides of the agreement.
With that in mind, here are the four types of purchase orders you need to know about.
1. Standard PO
You’ll encounter standard POs regularly. They’re the easiest to understand.
Standard POs are used when a business is making a one-off request for goods or services. The specifics of the request are known, including the price, quantity and delivery date for the order. They ensure that both parties are bound to pay – and charge – what they said they would at the outset.
Better yet, standard POs create an easy-to-follow paper trail for company expenses. This makes keeping track of purchases easier for HR managers and finance departments, providing a framework for employees to work within. Some applications can even streamline this process and reduce the need for masses of paperwork.
Standard POs are made as and when the need arises. When your office is running low on staples (or paper, printer ink, etc.), you’ll need to raise a standard PO to order more.
Unless you’ve meticulously tracked staple usage and estimated your usage, it’s best to use a standard PO rather than one of the anticipated or recurring types.
2. Planned PO
Planned purchase orders are like standard ones, but with an important difference.
Planned POs are made when everything is known except the delivery date. They are made in anticipation of the goods or services.
This kind of PO is for the office that does track their staple usage. If you can roughly predict when you’ll need them in future, planned POs are the best way to set up a provisional agreement with a supplier. You are agreeing to buy from that specific supplier with a loosely-defined schedule for delivery.
3. Blanket PO
Blanket POs mean less knowledge, but more flexibility.
Blanket POs are made when you know what good or service is needed, but the timings and amounts are uncertain. They anticipate the need of goods and services over a set period. Terms and conditions are agreed upon, as well as spending limits.
Blanket POs often mean that it’s possible to get a better price from a supplier, as it guarantees that you’ll purchase from them over a set period.
You’ve got an inkling that staples will be needed throughout the year. You know how many your company is likely to need during this period, but you’re uncertain when.
It’s cost-effective, then, to agree with a supplier that for the next year, you’ll buy your staples from them, possibly setting out rough amounts and establishing the price.
4. Contract POs
Possibly the most confusing of the PO types, contract POs are more like purchase agreements.
Contract POs are formal agreements made between the buyer and seller. They set concrete terms and conditions for all future transactions between the two parties and are legally binding, but do not establish anything else. Contract POs act as a framework within which standard POs can be made.
Contract POs do not have set expiry dates, so can be used to streamline and legally safeguard the PO process throughout the business relationship between buyer and seller.
You have a supplier you’d like to work with in future, but you’re unsure what, when, or how much of a product you’ll need. Creating a contract PO means that every standard order you place in the future will be backed up with legally binding terms and conditions.
Should either party attempt to do something that contradicts the terms, it’s possible to get lawyers involved and to refer to the contract PO. It’s an added layer of insurance that means you won’t get shorted when buying your staples!
Formalise your PO process
Mastering the different kinds of purchase order makes keeping track of your outgoing expenses more formal and accessible.
Digitising the process means doing away with stacks of paperwork, creating a database of expense information that is backed-up and easy to search. With a PO history that’s accessible in seconds, it’s easier to create accurate budgets and cut unnecessary costs.
Purchase Orders , working with vendors , expenses