Great news! Your business is booming and demand for your products continues to increase. While this is music to any business owner’s ears, you might have noticed that your operations are becoming more complicated — especially when it comes to managing your supply chain.
Email threads and verbal promises with your suppliers may have worked when you were first starting out. But now that your business is booming, sourcing supplies might be harder to manage and it’s time to start getting things documented in writing.
If this sounds like your current business state, you may want to consider using purchase orders. Here’s what you need to know.
What is a purchase order?
Essentially, a purchase order is an on-paper, legal agreement that protects both parties in the event of the impending business transaction going awry. It is the official document between a supplier and a buyer that communicates product specifications and defines the expectations of the business transaction. Purchase orders can detail a variety of requirements, including the type of product, quantity, price and an outline of delivery.
Whether you’re the buyer or seller, this legally binding contract is intended to protect all parties involved. The seller is protected should the buyer refuse payment. It also protects the buyer in the instance that the seller doesn’t deliver the goods or services.
You might use a purchase order, or PO, to buy products or services from an external supplier. Or you might be the external supplier and receive a PO when someone is buying from you.
Why should you use purchase orders?
Purchase orders communicate the buyer’s needs and define the expectations of the business transaction. Since it’s a binding contract, it protects the seller should the buyer refuse payment. It also protects the buyer if the seller does not deliver the goods or services (or if they deliver the wrong goods or services). Since a purchase order is legally binding, make sure you consult with a legal expert to make sure any purchase order you’re working with meets your specific needs.
How does a purchase order work?
Usually, the buyer prepares a purchase order. It should include the PO number associated with that order, the shipping date, billing address, shipping address, product request, quantity, price and any other information that is critical to complete the order.
If you’re the buyer, you should create the PO and then send it to your supplier. Once you receive the inventory or services from the supplier, it should be logged into your system and marked as processed. Finally, if the inventory or services meet your expectations, pay the supplier to complete the purchase order process.
What is the difference between a purchase order and an invoice?
Purchase orders and invoices are important documents for any business, and yet they are frequently confused.
The key difference between a PO and an invoice is who is creating the document. A buyer creates a purchase order to be fulfilled by a supplier. A supplier or seller prepares an invoice for the service, and is then paid for those services.
When used correctly, invoices can get your business paid faster. An invoice is a record of the goods or services you provided to your customer, and it’s a method for them to pay you for your work.
It is important to send invoices promptly so people are billed in a timely manner. And since invoices can be done online now, it’s easier than ever.
Managing purchase orders
While it sounds pretty straightforward, a purchase order can complicate your supply chain process. As a buyer, it’s important to invest in your retail inventory management and learn how to effectively manage your suppliers.
Here are a few tips that can help you do this:
Ordering in bulk can help you make the most of discounts and save a lot of money. And when done correctly, you’ll be able to cut the cost per unit of your items. Of course, ordering in bulk means spending more up front, so you only want to do this if your business is stable.
Send your invoices, purchase orders and vendor service contracts in a timely manner. It’s important to get these documents in your partners’ hands since they define the terms of agreement and protect your business. In addition, promptly sending documents shows a degree of professionalism that will instil confidence in your partners.
Try implementing a purchase requisition system into your business. This enables employees to request the materials they need to do their jobs. Not only does this empower your team, but it also gives you a better idea of the materials needed to run your business.