Everything You Need to Know About Purchase Orders: How to Create and Use Them in Your Biz

This is a post by Abby Heugel

When you first start out as a retailer, verbal agreements and emails with your suppliers regarding inventory purchasing might get the job done for small orders. However, as your business grows, those methods of doing business require something that makes things easier — and protect you and your assets — and that would be purchase orders.

Purchase orders are a staple for any retail business and for good reason. They enable you to track your stock orders, keep suppliers accountable, and help you stay on top of inventory management. 

In this post, we’ll walk you through the ins and outs P.O.s you’ll learn about the purchase order process, it’s benefits, and how you can optimize it in your business. 

Let’s dive in. 

What is a purchase order?

A purchase order is a legally-binding agreement sent from a buyer to a supplier that authorizes the purchase of goods and clearly outlines the expectation of the business transaction. It protects both parties involved in that the seller is covered if the buyer refuses to pay, and conversely, it protects the buyer if the seller refuses to deliver their products or services.

Purchase orders vs. invoices

Purchases orders and invoices have a couple of similarities. First of all, both are legally-binding contracts. Second, both contain details about the order and the mailing information, although the invoice also includes the order price, payment terms and conditions, and the date the payment is due.

However, the key difference is that while an invoice requests the payment for an order, the purchase order simply confirms that an order has been placed. In addition, the purchase order is created by the buyer when they order the product or services, and the invoice is created by the seller to request payment for those products or services and is usually sent after the order is complete.

What information do purchase orders contain?

Before integrating purchase orders into the purchasing process, it’s important to understand exactly what should be included in the document. While purchase orders will most often be customized to suit the needs of each individual business, there are a few details that many purchase orders contain:

• Name and address of both the buyer and the supplier
• Products and services being purchased, including quantity
• Purchase order number
• Price per unit
• Delivery date and location
• Agreed upon payment terms
• Terms, conditions, and additional instructions

The benefits of using a purchase order

Purchase orders allow both the buyer and the supplier to have matching records they can use to verify things like when and what was purchased and the price of the transaction. They’re also important because they can help companies track incoming orders and price increases, avoid duplicate orders, and improve communication with vendors.

In addition, they save time, which is something that’s often in short supply for retailers. Once you’ve set up the system, all you have to do is go in, find approved products for purchase, and place your order. If you have repeat purchases, a purchase order can even be generated automatically. You’ll also save time when the order arrives. Because the purchasing record is readily accessible, all you have to do is check the invoice against the record to verify the delivery is correct. 

Along with saving time, you can save money with more accurate budgets. Purchase orders require you to fill in the price and quantity fields, which gives you the information regarding how much you need to sell to make a profit. It’s also helpful to have a past record of purchases so that you can look at what you spent in the past to help plan for future budgets. 

Because a purchase order is a written, legal agreement, both parties are protected should an issue arise. For example, let’s say you were overcharged or didn’t receive the right quantity or type of items. You can go back to the purchase order to verify the details and help you resolve the issue.

The purchase order process: what you need to know

The purchase order process is one that encompasses everything from the initial placement of the order to the minute the order is received — and everything in between. However, most follow a general guideline and include the steps below: 

Creating the purchasing order — When a company wants to buy a product or service, the first step is to create a purchase order that includes key details, such as the price, quantity, delivery, and payment terms. Some POS systems — like Vend — allow you to create purchase orders and track them throughout the process, ensuring all order information is stored in one easily-accessible place. It’s also at this point that internal approval is requested and any necessary changes are made. 

Issuing the purchasing order — Once the purchasing order is approved, it is then sent to the supplier, who will also approve (or request amendments) the document.  

Receiving the purchasing order — At this point, the supplier receives the purchase order and tells the company that the order can be filled. When this happens, the purchase order becomes a legally-binding contract.

Issuing of a receipt — The supplier then sends the shipment, attaching the purchase order number so that the buyer can easily identify which order has arrived. 

Delivery and invoicing — After the product has been delivered or services have been rendered, the company will review the purchase to verify that it meets their standards before sending an invoice for the order that includes the purchase order number. 

Payment and closure — With the satisfactory delivery complete, the company will then arrange and fulfill payment with the seller per the agreed-upon conditions. After payment is made, the purchasing order is closed. 

Purchasing order best practices

Now that you know the benefits and process for purchasing orders, there are some best practices that can ensure you’re optimizing your time, money, and energy. 

Consider the following:

Digitize the process

First, go digital with your purchase orders, using a system like Vend. This saves you the hassle of additional paperwork, reduces the chance of errors, streamlines the process, and provides you easy access to electronic records when audit season comes around.

Keep your employees in the loop

Ensure that all employees are aware of the policies, procedures, and expectations when it comes to the approval and purchase order process. Consider creating a guide that can serve as a reference to outline the ground rules for specific purchasing scenarios. 

In addition, create an approval workflow that appoints a purchase manager in charge of approving all purchase orders, reducing the risk of duplicate orders or other organizational/financial mismanagement. 

Keep track of your suppliers

Finally, create a directory of different suppliers that includes everything necessary to complete the order — from their address and payment terms to prices and reliability. This provides you with a way to compare prices and quality of service, which in turn streamlines the purchasing process by clearly outlining which supplier will be most beneficial for your business.

The bottom line

While implementing purchase orders into your processes might add a couple of extra steps, it’s worth it to ensure that the process goes smoothly for both the buyer and the seller. Because expectations are clearly outlined, purchase orders can greatly cut down on any miscommunication and serve as a reference point should issues arise. 

As your business continues to grow, purchase orders are a way to leverage the many organizational benefits they provide — to your employees and processes, and also to your bottom line.