Updated: Oct 31, 2022 Show
No matter how much training you give, purchase orders just keep getting people confused. While you still may occasionally need to explain the difference between an invoice and a purchase order, too few people fully understand the PO steps and procedures they should follow. Let's cover the topic in an easy and approachable way for beginners. What is a purchase order?A purchase order (PO) is an official document, created by the buyer, which authorizes a purchase transaction for goods or services from a supplier. POs play an important role in controlling business purchases. A professional PO process builds robust supplier relationships and provides an audit trail of all transactions. It is generally assisted by some level of automation that helps speed up the process, improves communication, and minimizes financial risk. Why do companies use purchase orders?Let's face it. Businesses of all sizes can benefit from more financial control. Purchase orders are one way to keep control of costs. Here are 5 key benefits of purchase orders to business:
What information should POs include?POs generally include the name of the company purchasing the goods or services, the date, PO number, the description and quantity of the goods or services required, price and payment information. Learn how POs are a valuable insight source with our guide Spend Analysis 101. What are the steps in a simple PO process?The PO process is a part of a broader procurement process that includes confirming and specifying the actual need for goods or services before embarking on the purchase. It also includes processing payments and auditing results. 1. Creating the Purchase Requisition (PR)A requisitioner creates a document to obtain permission for the purchase to go ahead. It could be amended or added to before approval is received, or even canceled. 2. Issuing the POOnce the PR has been approved, the PO can be created after prices, delivery, terms, and conditions have been agreed. For large purchases, organizations usually issue a Request for Proposal (RFP) to their preferred suppliers. Before the order can be issued, some level of financial authority is required to sign off the purchase. The PO is usually then issued electronically to the chosen supplier. 3. The supplier approves the POIf any details are incorrect or unacceptable, the supplier may request amendments. The supplier then approves the amended PO if necessary, usually via email or using an e-procurement platform. 4. Purchaser records and files the PO, awaiting deliveryAfter the product has been delivered or the service has been performed, the organization will review the purchase to see if it meets acceptable standards. Goods are signed in on a Goods Received Note. Services are usually similarly signed off when the services have been supplied satisfactorily. 5. Approval and paymentOn receipt of the invoice, it is matched to the PO. Provided all is correct, the invoice is paid as per the agreed payment terms. Best practices in the PO processThere are some best practices in day-to-day or transactional purchasing. (There are more formal processes used in strategic sourcing and contract negotiation - not covered here).
Some problems to watch out for with POs
Many purchasing problems can be attributed to human error. Issues can usually be resolved fairly easily if your relationship with a supplier is based on clear communication and mutual understanding. Photo credit: Robert McGoldrick - Flickr. What are the five major phases of the acquisition and payment process?The acquisition and payment cycle includes processes for identifying products or services to be acquired, purchasing goods and services, receiving the goods, approving payments, and paying for goods and services received.
What is acquisition and payment cycle?What is the Acquisition and Payment Cycle? The Acquisition and Payment Cycle (also referred to as the PPP Cycle for Purchases, Payables, and Payments) consists mainly of two classes of transactions. The first class is the acquisition class.
What is acquisition cycle in auditing?The main activities of the acquisition cycle is: 1) purchase requisition, 2) authorized acquisition of materials, 3) receive of materials, 4) transaction recording in accounting, 5) bill payment authorization, 6) cash disbursement.
What is the primary reason for management's ability to overvalue inventory without rapid detection by auditors?Which of the following is a major factor in management's ability to overvalue inventory without rapid detection by auditors? Complexity in the valuation of inventory.
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