When you’re managing orders in any business, you’d hope that the process is straightforward, right? Yet, many businesses discover that it can quickly become complicated and time-consuming. The good news? It doesn’t have to be.
Whether you’re purchasing goods or services from sellers around the world, the key to a smooth transaction often lies in the details—starting with your Purchase Order. Consider it the foundation of a successful order, ensuring that everything gets delivered on time and as agreed.
In today’s fast-paced business environment, many companies use digital tools that automatically generate and verify purchase orders, streamlining the process. But even with automation, the human touch remains essential—it’s still up to you to ensure that all procurement information is accurate and complete.
The goal of this guide is to provide a clear overview of what a purchase order is, why it’s important, how to create one effectively, and why using purchase orders can benefit your business—whether you’re in manufacturing, retail, or any other sector.
What is a Purchase Order?
A purchase order (often abbreviated as PO) is a legally binding document a buyer sends to a seller to authorise a purchase. It’s one of the most important documents in any procurement process, regardless of whether you’re a small business or a large enterprise.
In essence, it formalises the financial agreement between a buyer and a seller. A typical purchase order will outline the products or services being purchased, quantities, agreed prices, payment terms, and other relevant details, such as shipping terms (INCOTERMS). It often includes a unique PO number for easy reference, which helps businesses keep track of numerous transactions throughout the year.
Both buyers and sellers benefit from using purchase orders. For buyers, it provides a clear record of what was ordered, ensuring that both parties are on the same page. For sellers, it guarantees that the buyer has committed to purchasing specific goods or services, which can aid in production planning and resource allocation.
How Do Purchase Orders Work?
Let’s walk through the process of creating and managing a purchase order:
PO Creation
The buyer, or purchasing department, drafts the purchase order. It includes all necessary details, such as the items being purchased, quantities, and agreed-upon pricing. Before finalising the PO, it’s often a good practice to have multiple stakeholders review it to avoid any issues later on.
Buyer Sends the PO for Seller Approval
Once the PO is ready, the buyer sends it to the seller for approval. It’s crucial to indicate that the PO is in draft form and subject to approval, helping to prevent misunderstandings or delays.
With today’s digital tools, the process is even more streamlined. Many platforms offer digital timestamps and tracking, ensuring that both parties can monitor the PO’s status in real-time.
Seller Reviews the Purchase Order
When the seller receives the purchase order, they review the details to ensure they can fulfil the order by the requested date. They may also confirm quantities, shipping schedules, and pricing, or raise any concerns before approving the PO.
Purchase Order Approval
If the seller agrees to the terms, they approve the PO, and a legal contract is established between both parties. This contract is formed based on three core elements: Offer, Acceptance, and Consideration. Essentially, the seller offers the goods or services at a specific price, the buyer accepts the terms, and the agreed amount is exchanged as payment.
Product Fulfillment
After the purchase order is approved, the seller begins fulfilling the order. Once the goods or services are ready, the seller issues a purchase invoice (PI), reflecting the same details as the PO, which formalises the amount due.
Payment of the Invoice
This final step involves the buyer paying the seller according to the terms set out in the purchase invoice. These terms can vary depending on the relationship between the two parties—ranging from upfront payments to payment on delivery or even 30 to 90 days after the goods have been received.
What Makes a Good Purchase Order Template?
A well-structured purchase order should include:
- Purchaser Information: The buyer’s company name, address, and contact details, along with the purchase order number and date.
- Seller Information: The seller’s business name and address. It’s also wise to include any registration or company numbers for verification.
- Shipping Information: Clearly specify where the goods should be shipped, the shipping method, and the agreed delivery terms.
- Order Details: Provide a detailed description of the items or services, including product codes, quantities, unit prices, and expected delivery dates.
- Summary: Include a total cost breakdown, applicable taxes, and any shipping fees or discounts. It’s also a good idea to add any terms that could serve as a safety net, such as “subject to approval of quality.”
Finally…
Purchase orders are essential in ensuring that both buyer and seller are aligned on the specifics of an order. They help protect both parties from misunderstandings and provide a legal framework for managing transactions.
We highly recommend integrating digital POs into your business processes for increased efficiency and accuracy, reducing the chances of errors or delays.
For industries like fashion, where managing suppliers, materials, and production cycles is complex, a Fashion PLM software can help centralize purchase orders, track materials, and improve overall efficiency.
