Using purchase orders (POs) can help an organization regain control of its spending and accelerate the process of acquiring goods and services needed by team members. But purchase orders aren’t just about paperwork; a well-oiled purchase order system will not only help improve your bottom line but also empower teams, especially finance, to monitor and anticipate expenditures.
In this blog, we provide an overview of everything you need to know about purchase orders. You’ll learn how they work, what benefits they can bring, and actionable advice on tailoring a PO system that aligns seamlessly with the needs of your organization.
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Before we dig into the ins and outs of purchase orders, let’s start with the basics: what exactly is a purchase order?
A purchase order, commonly referred to as a PO, serves as a formal offer from a buyer to a seller to purchase specific products or services at a specified price. It acts as a contractual agreement once accepted by the seller, detailing the items to be sold, their quantities, and the agreed-upon prices.
Beyond just a simple transaction, a PO provides a track record of purchases, aids in financial forecasting, and ensures both parties have clear expectations regarding the transaction. It’s an essential tool in business to ensure clarity, accuracy, and accountability in the procurement process.
When businesses start small they tend to have an organic purchasing process. Many organizations unwisely forego purchase orders because they perceive the paperwork to be a hassle that slows their processes down – or they simply forego purchase orders because they already have a working relationship with vendors. (Learn why purchase orders work for companies of all sizes.)
Over time, however, that process changes as companies develop new or better relationships with their sellers. Once a company grows and the purchasing demands become more specific, urgent, and/or complex, communication challenges can arise if a purchase order isn’t used or certain details are not correct on the order.
It can be a nightmare for both parties to determine where a request went wrong. Common problems can involve situations where a buyer receives their order and it does not comply with the desired specifications or if there is no purchase order to use as a reference. At that point, it’s likely that both the payment and an invoice were sent, which puts both parties in a significantly more complicated legal situation.
A purchase order provides legal clarity and concrete instructions for the sellers. A purchase order will also create a reliable paper trail that can be used as a point of reference when things go wrong.
A purchase order (PO) contains essential details that outline the specifics of a transaction between a buyer and a seller. Here’s a breakdown of the typical information included in a purchase order: