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What is a Purchase Order and How does it work?

Nov 11

Introduction:

When working in a business, you must know how to manage the purchases as well as the sales of your business. It will be impossible for you to deal effectively with all the other sectors of the industry if you ignore the inventory management system of your company. Keeping the record of the orders that are made and making the right decisions at the right time helps one succeed in achieving the business's goals. 

However, to manage the inventory of your business and handle the purchases effectively, you can always use automated inventory management software like Inventooly. Likewise, purchase order management is also critical for your business to know about what is exactly needed and when it is required. 

What is a Purchase Order?

A purchase order can be defined as a document that is sent from the buyer to the vendor to buy goods from them. It includes all the relevant information regarding the products that are required by the buyer, for instance, what size of products are needed when they are needed, and why they are needed. 

Moreover, it is essential to issue a purchase order to the supplier because when the supplier or the buyer himself forgets about the exact amount of goods, it could be verified by checking the purchase order. Therefore, it is very crucial to keep in check all the operations related to purchase order management so that any uncertainty can be avoided in the future. 

Importance of a purchase order:

It is undoubtedly essential to maintain the purchase order of your goods bought from the supplier so that you can quickly check the company's cash balance when the audit is conducted. In addition to this, a business person should use inventory management software like Inventooly for the management of all the orders as well as the sales of the business. 

Moreover, using such automated software and tools also helps to reduce manual effort, and automation improves efficiency and eliminates the chances of errors and mistakes in the calculations. Following are the points that will elaborate on the importance of a purchase order in the business. 

 

  • It is a legal document:

 

A purchase order is a legal document that is trusted by the buyer as well as the seller. Therefore, it has great importance in any business because it represents proof of the agreement between the buyer and the vendor. If any discrepancy occurs, both parties can sue each other who carry out misconduct.

 

  • Helps to minimize duplication of orders:

 

Another factor that shows the importance of creating a purchase order is that you are free and relaxed that you have the entire record of the purchases. So if any duplication of demand is about to occur, you can verify from the purchase orders and receipts given to you by the vendors.

 

  • Saves a lot of time:

 

Making purchase order management effective and issuing a purchase order when buying goods from the vendor proves very helpful for you in the future. When you are about to audit your business or if you have to check the balance of expenses conducted in a month, you can tally them from the purchase orders issued by your business to the vendors.

How does a PO work?

The buyer gives a purchase order to the supplier directing him to deliver the specific goods within a specified period. Following is the process of how a Purchase order works in your business;

 

  • Purchase Requisition is made:

 

When something is to be bought from the vendor, you will first make a list or purchase requisition document. It includes all the information about what product is needed when it is needed, till when it should be delivered, what should be the size and color of the product, etc. all such information regarding the products required are enlisted and then it is further sent to the specific staff member for the approval.

 

  • Issuance of Purchase Order to the vendor:



If a purchase requisition is incomplete or some wrong information is entered, it is not approved by the staff officers and sent back for editing. However, if it is approved, then it becomes a purchase order. It is not sent to the vendor asking him to deliver particular goods as stated in the purchase order. 

 

  • Order is completed:

 

When the vendor accepts the purchase order, he sends the receipt to the buyer, including the tracking number of the products he has ordered. This tracking ID helps the buyer to recognize his products once they arrive. Order is then completed and shipped towards the buyer, informing him about its arrival date also. So the buyer knows when to expect his ordered products. 

 

  • The arrival of the order:

 

When the shipment arrives, the buyer can then tally the tracking number given to him b the supplier and match it with those on the shipment boxes. However,  it is sure that when you have ordered a large number of goods, they may arrive in a portion of deliveries one after another. But not to worry, as you can easily tally them from the receipt given to you by the vendor.

 

  • Invoices are processed for payment:

 

Once you have matched the products as those stated in the purchase order, you can be sure that all the products are as per your requirement. So you can now easily further forward the invoices to the accounts payable and clear all your payments. 

As discussed above, you should be careful enough about the purchase order management of your business. You can also use inventory management software like Inventooly to ensure all the orders are managed effectively at the right time. Such types of inventory management software, when used, assist you very well in terms of making the right decision when needed.