What is a purchase order?
A purchase order (abbreviated to PO) is a document that specifies the type, quantity and agreed price for products and services. It is issued from buyers to sellers and acts as confirmation of an order. Purchase orders are primarily used to control the purchasing of goods and services from external suppliers.
Why use a purchase order?
There are a number of advantages to using a purchase order.
- Purchase orders allow buyers to clarify their specific needs to sellers. This gives a clear start to your ongoing communications, and also gives you both something formal to check back on if there are any discrepancies or disagreements later on.
- A purchase order can also be used to help manage inventory, of which handling incoming orders is usually a part. Purchase orders help employees, or yourself, manage incoming and expected deliveries.
- As purchase orders include the agreed price, you can factor this straight into your budget.
- Purchase orders are also a key part of an audit trail – meaning that when auditors will pay close attention to goods and services coming in to the business in relation to payments going out. Having written proof of transactions makes their job much easier, and keeps your business much clearer.
- If you don’t have a pre-existing contract, then purchase orders are legally binding. Once the seller accepts the purchase order, it forms a legal contract between them and the buyer. Because of this, the buyer should make sure the PO is clear so as to avoid confusion. This purchase order will also protect you should also help if the buyer refuses to pay.
- Sellers can also use purchase orders for order fulfillment and payment processing. They may also use the purchase order number on their invoices (see below).
What does a purchase order contain?
Purchase orders will usually contain all your essential company information, including your name and address. It will also include the seller’s name and address and the date the PO was issued.
You’ll also need to include the order information, including the type of goods or services provided, their price and the quantity where applicable. You should also include any additional details relevant to the sale.
In addition to the above, you should also include your payment information, a mailing and invoice address (note if they’re different to the business address) and the purchase order number.
What’s the difference between a purchase order and an invoice?
Purchase orders and invoices contain similar information, though invoices will also contain the purchase order number to confirm which transaction it relates to.
Purchase orders are prepared by buyers, while sellers prepare invoices once payment has been received. On some occasions, buyers receive an invoice with a payment due date.
What is the purchase order process?
The purchase order process usually consists of the following five steps:
- If you have separate departments for finances and purchasing, then you may need a purchase requisition to go from the latter to the former. This is essentially a form requesting approval to make the purchase.
- Once the purchase requisition is approved, you can send a purchase order to the seller.
- The seller will review the purchase order. If you’re the seller, remember to pay close attention to the quantity, price, amount due and Ts&Cs. If you’re happy, you can approve the PO and prepare the delivery. If you’re unhappy, send it back for further discussion until you can make a deal.
- For the next step, the buyer records the purchase order. This is a good habit to get into for auditing.
- Once that’s all been done, the goods or services are delivered and approved. Afterwards, the seller sends an invoice to the buyer, the invoice is paid, and the deal is done!
Purchase orders in KashFlow
In order to create a Purchase Order within KashFlow, first this feature needs to be enabled. This can be enabled in Settings > Purchase Order Options, then tick Enabled.
This will then turn any unpaid receipts in to Purchase Orders until a payment is made, it will then convert to a Purchase Receipt once cleared and paid. This means in order to create a Purchase Order you will need to follow the steps for Creating a Purchase Receipt, but leave this as unpaid.