Define purchase order and why it important in every business?

Define purchase order and why it important in every business

Purchase Orders are the commercial document that represents the official buyer-seller conversation agreement regarding type and quantity of purchased goods or services with the costing. It is a legal binding document that is built between the buyer and seller.

The purchase order has all the details of the products on which both the parties have agreed such as the price of the product, date delivery, terms of payment, etc. These orders are computer-generated and have passed through all the purchase requisition process that allows for better inventory purchase and their tracking.

Importance of Purchase Order

Following are the reasons why Purchase Orders are important:

  • Orders are easier to track
  • Provide clarity in communication
  • Easier for your suppliers to file the items in PO
  • A huge help in conducting audits without any problem
  • Gives contractual, legal document for both the buyer and the supplier.

Creating a Purchase Order (PO)

The steps that are involved in creating Purchase Orders Process are:

  • Purpose of PO: The purpose of the purchase order is very clear and short that a buyer wants to purchase some supplies or inventory material for production or other operations. This is a legally created document which provides the significance of both inventory management and payment tracking. Also, it helps the buyers and suppliers both to compare for the future inventory orders, their price and accuracy of delivery.
  • Submit PO: The purchase order document is generated by the buyer through their purchase or Inventory management department. This is an electronically developed document for better tracking purchase items, their delivery and payment status. The Po also has a unique tracking code known as PO number which is used for tracking the shipment, it has more details like shipping date, billing date, billing address, the quantity of the product, the weight of the product, total price etc.
  • Processing of PO: When the buyer submits the PO then the progress of purchase is automatically created where the status of PO id defined as under-process and the order has been received by the supplier. And when the order is physically received it is matched to the PO for confirmation and then the status of Po is changed to the payment required and payment is done.
  • Use of PO for the Supplier: The PO helps the supplier with its order fulfilment and payment process. When the PO has received the items on the order are prepared for the delivery (shipment). The PO is marked with status as payment awaited when the order is out for shipment. The supplier is enabled to monitor its payment and credits through the PO.

Importance of Purchase Orders in a Business

  • PO provides a detailed record of purchased inventory and its expenses. It is a time-efficient process for tracking many kinds of purchases, their GRN, their expenses, etc.
  • They are good and reliable sources for future purchase processes. It can control the related costs by matching it with previous documents and their utilization.
  • It is a great way to update the system of the hand-written or oral method of communication for POs to the electronic method, which is controlled and specific.
  • POs help the organization to improve its processes and functioning. The creation of the purchase order document helps effectively in the documentation of expenditure for every department and project separately to have a precise view over the expenses, this gives you the power to make a better decision for controlling expenses.
  • The PO also helps to track the shipment by the unique created PO number.
  • It creates a high level of clarity in communication between all the departments and parties. As PO contains all the necessary details of the required items, it is easier to understand the requirement of the order.
  • The PO is created by the approval of the designated manager before it is forwarded to the supplier, therefore, the PO should be well-informed if any question arises.
  • It enables the organization to control its cost of purchased and received goods. The order is well-informed with the details such as the cost of the product, the quantity of the product, buyer’s details to purchase from, etc. This information is enough to align and compare all the invoices and increased costs. Then the organization can accordingly put a small or large order.

Purchase Orders are the documents which act as the primary source information when there is a comparison of reports in the business review and also helps in the audit procedures. Asset management software can help you with all the inventory management along with purchase order procedures and their received note. The application assists you with accurate and useful insights.

Hi, I'm Raj Hirvate and I am a Tech Blogger from India. I like to post about technology and product reviews to the readers of my blog. Apart from blogging i'm a big Anime fan I Love Watching Naruto, One piece and Death Note.