What is a Purchase Order and When Do You Use It? | CloudCFO PH
What is a Purchase Order and When Do You Use It?

What is a Purchase Order and When Do You Use It?

Posted on February 22, 2023
5 mins read

Whether you’re a small business or a large enterprise, purchase orders can help the efficiency of your operations. Aside from organizing your orders, this document can protect you from non-fulfillment of the agreed terms. So, what is a purchase order, and how can it help your business?

Contents

What is a Purchase Order?

The meaning of a purchase order lies in its function. Purchase orders are legally binding contracts containing the products or services a buyer wants from the supplier. Unlike invoicing, buyers submit these forms before the delivery to place an order. You can think of it as a way to confirm your purchase.

Maintaining the accuracy and completeness of a purchase order allows for an organized record and smooth inventory management. It prevents your team from receiving items you don’t need.

Parts of a Purchase Order

Here are the parts of a purchase order to help keep the document’s information accurate and complete.

Company Information

This part of the purchase order includes everything about your company as the buyer and necessary information for the transaction. It contains the company name, logo, contact details, address, point person and the requesting department.

Purchase Order Number

This number serves as your reference code, helping you track your specific purchases throughout the order process.

Date

A purchase order may contain several dates. The date at the top of the document indicates when the requester created the purchase order. You can also include other dates under the terms and conditions, including expiry, delivery and acceptance dates.

Vendor Information

This part includes the supplier’s information, such as their organization and contact details. If possible, address the document to the supplier’s contact person.

Item Description

Your purchase order must include the specific product you want. You can make your purchase order more specific by citing your chosen product type’s reference or model number.

Quantity

This detail pertains to how many units of the item you want to purchase.

Unit Price 

The unit price indicates the cost of an item per unit.

Total Price

This price point shows you the sum amount of your purchase order.

Payment Terms

For this part, you can indicate the mode of payment and due date. You can also state whether you’re paying before or after the supplier has delivered the goods.

Shipping Information

Aside from the payment details, consider adding more information about the mode of shipment and any delivery fees.

When to Use a Purchase Order

You now need to know how a purchase order works to maximize its use. 

Typically, buyers issue a purchase order to formalize the pricing and quantities of the items they need. But as it is legally binding, buyers also use the document to ensure that their supplier delivers what they expect. 

For example, you need 90 pouches for your merchandise’s packaging. However, your supplier was only able to send you 80. In that case, you can use your purchase order to back up your claim that the supplier must give you 90 units of the item within the specified time. 

On top of this, a purchase order works to protect you from accepting defective products. If your purchase order specifies that you have the right to refuse faulty items, you can send them back to the supplier and have them replaced.

Moreover, acquiring inventory may become more complex and challenging for large enterprises dealing with multiple product types and quantities. A purchase order can solve this problem by providing a reference point so you know what comes in your inventory and avoid under or over-stocking.

How to Create and Submit a Purchase Order

1. Gather information on the items or services needed

Before creating a purchase order, you must first know what you need from the supplier. Doing so ensures clarity and avoids any mix-ups from the supplier. Make sure you jot down the product type, how many units you need and the date of fulfillment.

2. Research vendors and compare prices

Check your options, compare and select. Prices and offers may differ from one supplier to another; some may even offer bulk discounts or free shipping. It’s best to widen your list of options to see which will give you the best deal. 

3. Fill out the purchase order template

Once you’ve decided on your target vendor and chosen items, you can make your purchase order. When filling out this document, remember to include all necessary details, such as your contact numbers, product order, etc. You can also use a template to ensure your purchase order’s completeness.

4. Review and approve your purchase order

Maintaining a complete and accurate purchase order is a must to ensure you get what you expect from the supplier. Never forget to review the accomplished purchase order form twice or even thrice. If the details are correct and complete, affix your signature and name to confirm your order.

Improve Inventory Management with Purchase Orders

Purchase orders are more than just tracking stock levels. These documents can ensure you receive the correct items and quantities when you need them. This way, you can prevent under or over-stocking and have enough inventory to meet your customers’ demands. 

Maintaining the accuracy and completeness of this document is essential. As such, enlisting the help of a professional like CloudCfo may just be what you need. We are a cloud accounting firm in the Philippines, providing clients with different accounting solutions to keep their finances in order.

If you’re looking for efficient online bookkeeping services, contact our experts to know how we can help your business stay financially organized.

DISCLAIMER: This article is strictly for general information purposes only. Nothing in this article constitutes or intends to constitute financial, accounting, regulatory or legal advice and must not be used as a substitute for professional advice. It is still necessary to consult your relevant professional adviser regarding any specific matter referenced above.

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If you want to know more about our tailored services and processes, drop us a line to discuss how we can help you to grow your business. We will respond to you within 24 hours.