Purchase order: how and why to use it in your company’s process

The purchase order, otherwise referred to as a purchase order or simply a PO, is a nice tool for controlling business expenses.

There’s so much to learn about the basics of using a purchase order. But don’t worry, as we’ve got it all comprehensively compiled here to help you in getting a 360-degree view of the subject.

You will learn what a purchase order is, what kind of information it should contain, what the main benefits are for using it, and how you could implement this system step-by-step in your company.

What is a purchase order?

A  purchase order is a commercial document sent to a supplier authorizing a purchase. It can be described as an “invoice in reverse,” as it formalizes an order for goods or services.

Contains specific information such as products or services to be delivered. Purchase orders, also called purchase orders, are not contracts and almost always have much simpler texts.

An order fulfills three main functions:

  1. Inventory input and output management . In the case of businesses that need inputs or resell goods, the document helps determine when a certain item or raw material is needed.
  2. Financial control . If expenses are only authorized through purchase orders, then no employee can spend money on behalf of the company without it.
  3. For the partner (or supplier) , the order serves as a signal that everything is okay and that the item or service can be provided, since the buyer is committed to paying for it.

How does a purchase order work in a company?

The information on a purchase order can vary, but almost always includes:

  • Name of the company purchasing the good or service;
  • Supplier’s CNPJ;
  • Date;
  • Description and quantity of goods or services (potentially with delivery time);
  • Price;
  • Payment conditions or information (e.g. payment within 30 days by bank deposit after delivery of the goods);
  • Correspondence and/or delivery address for goods;
  • Purchase order number.

In many cases, purchase orders can only be issued after the supplier has registered in advance. In other words, the seller must first provide the company with some basic information, which may include banking information.

In turn, the supplier can make an inquiry about the company (such as credit and debts) before accepting to receive the purchase order. Purchase orders are used for various reasons and benefit various sectors of the company.

How to make a purchase order to the supplier

Creating a purchase order can be as simple as putting all the relevant details into a template and sending it to your supplier via email (or other means). It’s a win-win for all parties involved. Here’s how.

Clear expectations

The purchase order gives your company an opportunity to make your demands very clear and documented to suppliers.

The buyer has a document that clearly states which items they have purchased, minimizing the risk of supplier errors. This allows you to speak the same language in terms of type, category, color, quantity, delivery time and address, etc.

If this clarification was not sufficient, purchase orders serve as a formal document proving that the order was not delivered as agreed.

Purchasing management

The purchase order provides the purchasing, finance or operations professional with the documentation needed to track and identify orders more efficiently.

Financial management

Your business benefits from having clear records of how money is spent. A  purchase order can be immediately included in the budget. The finance department gains a lot of leverage when every purchase has to be approved first.

And because the purchase order number will match invoices and delivery notes, suppliers should receive fast, accurate payments.

Legal protection

Auditors, whether tax or investor relations , are constantly looking for discrepancies. They will look at things like the goods and services purchased by the company, the prices, and the terms. Purchase orders help document everything and show that management is on the right track.

However, a purchase order may serve as a legally admissible document alongside a contract. Therefore, in the event of a dispute, both parties can be able to prove that an agreement on the price and quantity of the items was reached.

Purchase Order Limitations

Purchase orders are effective for purchases with a predetermined price and quantity. You cannot use a purchase order for all of a company’s expenses. Be aware of the limitations of the model:

  • Recurring bills : electricity, internet, water or rent cannot be detailed on a purchase order.
  • Monthly Subscriptions : Subscriptions can be billed monthly or annually, but are not treated as a purchase order.
  • Services with varying costs : Financial, marketing, advertising, and legal services typically do not have a predetermined cost. You are billed for these services after the work is completed and do not create a purchase order for them in advance.
  • Internal expenses : An employee’s reimbursement request is used to process the internal purchases for which employees are reimbursed. The employee does not need to submit a purchase order for things like office supplies or business travel.

How to implement a purchase order system

In this section, you will learn tips on how a company that does not have a purchase order system can implement one.

1. Define a purchasing policy

A good purchase order system is one that enforces your purchasing policies. The policy should clearly and succinctly define your company’s position on:

  • The role of purchasing in the company;
  • How employees define the choice of suppliers;
  • Whether the priority is to maintain relationships with existing suppliers or to always look for new options;
  • What types of purchases require a purchase order (e.g. above a certain value);
  • Ethical guidelines (e.g. not buying from a relative’s company, etc.);
  • Guidelines on how to negotiate prices and conditions;
  • How to resolve conflicts with suppliers.

2- Distribute roles and responsibilities

Once the rules of the purchase order system are established, it is time to define the people responsible for executing them. Do not allow any employee to submit purchase orders as needed, as this practice can result in duplicate orders. The most common roles are:

  • Systems administrator:  able to include and configure the roles of team members;
  • Approver:  person with authority to spend company money. This is the person who gives the final “stamp” (real or virtual) on the purchase order.
  • Financial:  the finance team must have full access to the system so that they can control the process and reconcile invoices;
  • Member:  Any employee authorized to create purchase orders. In more decentralized companies, there will be many, at the cost of more people taking on the burden of administrative functions.

3- Choose the information for the purchase order form

Most purchase order systems have ready-made templates. But since every business is different, there may be some extra information you want to include.

In many companies, as we have shown, only pre-authorized suppliers can receive purchase orders. They may be given a registration number that must be included in the header.

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