A purchase order is a type of document that a buyer sends to the business that’s selling them goods and/or services. Once the transaction is officially recorded, the order can be used for various financial purposes, similar to a receipt or bill, only legally binding and more detailed in certain areas.
Are you interested in creating a purchase order but aren’t sure how the process works or what kinds of positive and negative impacts it can have on your business? We have all the information you need.
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How Does a Purchase Order Work?
Purchase orders are generally done by businesses that are buying things from other businesses. For example, if you run a food and beverage service, you will need to consistently order stock from the proper suppliers or manufacturers and, for financial or tax-related purposes, keep legal records of these sorts of transactions.
While the quantities of goods and/or services needed can vary, most businesses want them to be as large as possible to limit the number of purchase orders they have to make on a regular basis. This is how the process might go:
- Your food and beverage service needs to restock its refrigerator, so one of your staff members fills out the appropriate form(s) detailing the necessary supplies.
- Once you’ve figured out everything you need, you can contact the appropriate supplier (by phone, online, etc.) to send in your purchase order.
- If the supplier is able to fulfill the purchase order, the price and deal conditions will be approved and the whole agreement becomes legally binding.
- Depending on the terms of the agreement, you can pay the supplier right away or at a later date, once the order has been delivered to your establishment.
- Just before or after the supplies are delivered, you should receive an invoice that contains all the details of the purchase order, which you can add to your records.
Keep in mind that these are just some of the basic steps to the average purchase order process. Be sure to ask your supplier or manufacturer about all their payment and shipping conditions before you buy or accept any goods or services from them.
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What Details Are Included On a Purchase Order?
Essentially, a purchase order displays all the relevant information about the transaction, so there are no discrepancies and all parties involved are on the same page and can keep copies for their records. The main elements you’ll see on a purchase order include but aren’t limited to:
- Purchase order reference number and date
- Contact details of the buyer and supplier (names, phone numbers, etc.)
- Billing and shipping addresses
- Purchase order date and estimated delivery date
- Delivery method and shipping terms
- Details of the goods/services being delivered (quantity, unit costs, etc.)
- Subtotal, line total, and taxes charged
- Final cost of the purchase
- Payment conditions (method, due date, etc.)
Once again, the exact details you find on your purchase order will vary depending on how you and your supplier do business. However, the main information included will be the contact information of both parties, the payment terms and method, and the technical details of the order itself (quantity, reference number, price, etc.).
To make the whole process easier, most businesses use some form of electronic accounting system to create and send out their purchase orders. Some software even allows you to add your company watermark to the order for an extra level of authenticity.
Is a Purchase Order The Same Thing as an Invoice?
Actually, no. While most purchase orders will include an invoice at some point, there are several key differences between these two documents, namely the following:
A purchase order…
- Is designed by the buyer before the purchase any goods or services
- Includes a basic description of which items or services to be purchased
- Outlines preferred payment terms and shipping method
- Contains business and financial details of the buyer
- Is designed by the supplier and sent to the buyer after the purchase is complete
- Contains the supplier’s business details and acts as a form of billing
- Describes all the items or services that have been delivered to the buyer
- Details how much the buyer owes (per unit & overall) and when payment is due
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What Are the Benefits of Using a Purchase Order?
While not every operation needs to make frequent purchase orders, there are plenty of benefits of making them a standard part of your business model. For instance:
Better Inventory and Financial Management
Perhaps the main benefit of using a purchase order is that it allows you to restock your inventory and track your expenses with less hassle. Not only does this assure your shelves will remain full, but it also helps keep your business running smoothly and reduces the likelihood of any financial or legal issues arising. This way, you can maximize your revenue, cut down on costs and wasted time, then adjust your budget accordingly.
Fewer Problems During Audits
If the Canada Revenue Agency ever decides to audit your business, having an official paper trail, including detailed purchase orders can make a world of difference and help your business avoid lawsuits, fines, or other penalties. With the proper documents on hand, the auditor can confirm that all your income and expenditures are being declared. Otherwise, the auditing process can be annoying, time-consuming, and expensive.
Clear Communication Between Your Business and Your Supplier(s)
Building a solid business is about maintaining good relationships with the people around you, particularly those who sell you goods and services. Many suppliers appreciate concise and official purchase orders because they make life easier in general and help their business avoid financial or legal troubles. In fact, clear communication and paperwork lead to fewer budgetary issues for every party involved.
What Kind of Business Can Benefit From a Purchase Order?
All in all, pretty much any business can benefit from a purchase order to pay for the goods and services they need. That said, depending on the size of your business and what it needs for its day-to-day operations, there are certain circumstances where drawing up purchase orders may not be necessary or worth the effort, such as when:
- If you own a small business that doesn’t move a lot of inventory
- You aren’t dealing with a large number of suppliers
- Covering moderate/recurring costs (hydro, monthly subscriptions, etc.)
- Reimbursing internal expenditures (travel, training costs, etc.)
- Financing future or ongoing expenses (advertising, legal situations, etc.)
- Using company credit cards or other payment methods is more efficient
- You’re looking to reduce the amount of paperwork you have to deal with
Would a Purchase Order Be Useful to Your Business?
Purchase orders can definitely make things more convenient and cost-effective in many respects. For those businesses that purchase a lot of supplies from multiple providers, staying organized is important and purchase orders are a great way to achieve this.