As a business owner, tracking your inventory and ordering supplies and sellable goods may not be your favorite task, but it’s certainly essential for the success of your company. Purchase orders are essential for a well-managed purchasing process, and they can be used to achieve financial success.
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A purchase order (PO) is a legally binding document created by a buyer and presented to a seller. Much like your “cart” on an e-commerce site, a purchase order is essentially a list of what you want to buy. It lays out the order details, including the quantity and types of products the buyer needs, as well as payment terms and delivery details.
The difference between a purchase requisition and a purchase order is that the latter acts as a contract between the buyer and the seller. By submitting an order, the buyer is committing to purchasing goods or services for the agreed-upon amount. Since the order is filled before the buyer receives their bill, a purchase order gives the seller insurance against non-payment.
Purchase orders are usually used by businesses that are ordering goods in large quantities. For example, a pet shop may need to buy several types of dog food from a supplier, and order many bags of each type of food. Here’s the purchase order process the pet shop owner would use to get the goods they need:
Buyers can also create special orders for especially large shipments or recurring purchases. A standing purchase order allows a buyer to purchase the same products many times over using the same PO number. A blanket purchase order is an agreement between both parties for multiple deliveries over a set period, for a set price. Blanket orders are usually used between companies with a strong relationship, and sometimes come with discounts or other incentives.
Because purchase orders and invoices are both legally binding financial documents that are exchanged between sellers and buyers, it’s not surprising that the two are often mixed up. The two are also connected because a purchase order is often used to create an invoice, as a reference for the goods purchased and their prices. However, each document is used at a different point in the buying process, and they are used by different people as well.
Here’s a quick list of differences buyers and sellers need to know:
A purchase order is used by a buyer to place an order and is issued before delivery.
An invoice is issued by a seller using invoicing software after an order is delivered. It defines the amount the buyer owes for the purchased goods and the date by which the buyer needs to pay.
There is a plethora of software available online to help you create purchase orders, but you can also use a simple Word or Excel document to make your own order forms! Here’s what you’ll need to include:
In the end, a purchase order looks very similar to an invoice, which is yet another reason the terms are often confused. At the top, you have the contact information and details for each company, plus the PO number and date. Below that is generally a table, with the products, quantities, details, and prices in separate columns. And at the bottom, you’ll place the total order amount, the total price, and any other order or payment terms, along with an authorized signature.
We hope you’ve found this guide helpful, and that you have a better understanding of what a purchase order is and why it’s so important. When used properly, purchase orders can help you track your supply needs and make smart financial decisions for your business. This, in combination with other good business practices, helps you create a path towards success! CBX Cloud allows retailers to collaborate with their suppliers in one cohesive workspace to track products all the way from the design and development stages, to getting products packed and shipped. If your current process is scattered and siloed, see how CBX’s Supplier Management Software may be beneficial to you.
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