A purchase order or PO is a business document prepared by a buyer and sent to a supplier. The PO becomes legally binding once the supplier accepts it. In the PO, the buyer lists all the items they wish to buy at a certain price.

Other items on the PO include the expected date of delivery, as well as the terms of payment. While in the past buyers created POs manually, today most businesses have partially automated the process. That has led to improved payment and inventory tracking, and overall efficiency.

Purchase Order

  1. Why Use Purchase Orders?
  2. Preparation of the PO
  3. How Buyers Process Purchase Orders
  4. How a Supplier Processes Purchase Orders
  5. Purchase Order Software

Why Use Purchase Orders?

Businesses and organizations use purchase orders when buying supplies on account, while suppliers use the PO as security when supplying the goods and services. Suppliers can also use the PO to keep track of the inventory they have shipped, and what is still at hand.

On the other hand, buyers can use Purchase Orders to take inventory of items received. Other users of POs are commercial lenders, who use them as a reference when lending funds to a supplier.

Preparation of the PO

The Purchase Order is usually prepared in the purchase or procurement department. While a few buyers may still be creating the PO manually, a majority of enterprise buyers use purchase order software.

Purchase order software allows better tracking and sharing of PO with suppliers in real-time. Most important, PO software uses standardized forms, which helps to eliminate human errors.

Some of the important details of the purchase order include:

  • A PO number
  • Shipping date
  • Shipping address
  • Billing address
  • Requested items
  • Quantities
  • Item prices 

The PO number is used to match purchases with shipments, as well as matching invoices for the supplied items. The rest of the details ensure the suppliers understand how to fulfill the PO, and the two parties can use them to make any follow-ups.

How Buyers Process Purchase Orders

As soon as the supplier acknowledges receiving a PO from a buyer, the buyer creates an in-progress status for the PO. The status remains in “in-progress” mode until all the items have been received.

After the items are received at the shipping address indicated in the PO, the buyer scans them into inventory. The buyer then changes the PO’s status to “pending payment” or “processed,” if the payment has been made. The buyer ends their legal obligation by making the payment indicated on the PO.

How a Supplier Processes Purchase Orders

A supplier uses PO to source and delivers goods or services to their buyers. Suppliers, just like buyers also legally required to keep their PO for future reference.

In some states such as California, businesses should keep the PO records for as long as 7 years. That requirement holds even after a business winds up its operations.

When a supplier receives the PO, they use it to get the requested items from their inventory and package them for shipping.  After packaging the items, the supplier ships them and then updates the PO and inventory system accordingly.

Finally, the supplier fills out important details such as expected time of arrival, tracking numbers, and payment dates/reminders. This final step is important for the purposes of credit enforcement and customer satisfaction.

Purchase Order Software

Overall, that is all there is to creating and processing purchase orders. If you do not have PO software, then contact us now. PO software can streamline the way you process and budget for your inventory.