Purchase orders, sent from a buyer to a vendor, are documents needed to authorise a purchase. But, a PO also sets a clear expectation of when, where and how delivery or execution of the purchase should happen.
Why is this important? Well, both parties are able to refer back to the PO if delivery doesn’t take place as expected.
Here's why purchase orders are used.
They make orders legally binding
Once it has been accepted by the vendor, a PO can act as a legally binding agreement in the absence of a formal contract.
As a minimum, it should contain:
- Details of service or goods purchased
- Quantity of each item
- Agreed price
It could also include:
- Delivery method
- Delivery date
- Terms of payment for the buyer
- Purchase order reference number
In short, the more detail you put on your purchase orders, the more clarity there is over what has been agreed.
They provide a clear audit trail
As well as offering legal protection, purchase orders help with inventory, management and payment tracking. For auditors, they offer an accountable trail of a purchase. Auditors can use a PO to see exactly when it was raised and what it was for.
As a company, you should be transparent in the way you issue, process and record POs. Any auditors on the lookout for financial discrepancies will struggle if it's well documented. The auditing benefits of a PO extend to the vendor, too. They’re able to reference them in their own accounts when recording orders fulfilled and payments received.
They're used to track business expenditure
For your finance, procurement, and operations teams, POs are a useful way of tracking business expenditure. Crucially, these departments can always see how much is spent and what it’s spent on.
This is highly beneficial. When it comes to budgeting, it makes it easy to see the amount that’s been committed for a particular purchase. Because the expenditure has been documented, it can be allocated against outgoings. As a result, there are fewer surprises when invoices start to land on the accounts desk.
POs allow you to monitor your employees spending, too. When staff know their expenditure is tracked, they'll likely be careful about how much they spend.
They enable accurate invoicing
The difference between POs and invoices is that a purchase order is issued by the buyer to place an order for goods or services, whereas an invoice is raised by the supplier to request payment of those goods or services.
In theory, both the PO and the invoice should include much of the same information, such as details of the items being purchased and their agreed price. This helps the vendor to raise an accurate invoice against the purchase and the buyer to easily match the invoice against the PO they issued.
The only difference is that an invoice would also include terms and/or a schedule as to when payment is due.
They help operations run smoothly
Finance teams and business owners can keep check on spending using POs. They're a simple way to help departments function efficiently.
A fast and efficient purchase order system plays a significant part in helping businesses of all sizes control expenditure and allow for accurate budgeting.
In short, POs mean you can focus your time and energy on developing and growing your business, not shuffling through bits of paper.
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