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Why use purchase orders?

Are you running a small or midsize business (SMB) but not using purchase orders? When most small businesses start out, they forego purchase orders in favor of handshakes and informal processes: an unspoken agreement between a small-time supplier and a trusted vendor. But what happens if there’s ever a dispute or disagreement about a payment, quality standards, or even performance? You need a document that you can reference when business deals go south.

That’s where purchase orders come in. As your business grows in size and complexity, a formalized system ensures your purchases are ordered, budgeted for, and fulfilled accordingly. Purchase orders are an important tool that business owners like you should consider leveraging to ensure your spending stays within budget. Without purchase orders, tracking expenses is more difficult and prone to errors, and validating delivery reports becomes a nightmare.

A purchase order may be more important than you realize. In this post, we’ll go over what purchase orders are, the benefits of purchase orders, and why you should use purchase orders for your small business. Read on for a comprehensive guide on purchase orders for SMBs, or use the links below to skip to the section that interests you.

What is a purchase order?

A purchase order—also known as PO, purchase request, or purchase requisition—is a legal document and binding contract created to ensure your business with an outside vendor or contractor goes smoothly. The purchase order will identify the different payment terms of the transaction, such as product, quantity, and agreed upon price.

Purchase orders also ensure spending stays within budget. Without purchase orders, tracking expenses can be challenging, errors are more likely to happen, and ensuring you received the correct items is difficult. You might say, “Isn’t a purchase order the same thing as an invoice?” Actually, they differ.

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How purchase orders are different from invoices

A purchase order is created by a buyer, who wants to make sure they received exactly what they ordered. Meanwhile, an invoice is a statement of money owed, which includes the due date and available discounts like early payment. Invoicing is also issued by a vendor or supplier who requests payment.

Most SMBs still use spreadsheets to manage purchase orders. However, using manual processes with purchase orders can put your company finances at risk because you can’t:

  • Monitor your expenses accurately and efficiently
  • Prevent money-losing mistakes
  • Stay within your budgets

In fact, reports show that 88% of spreadsheets contain errors. While spreadsheets are easy to use and can cost you little-to-no money, it’s inefficient and, frankly, unwise for a growing business. Spreadsheets have limitations to how much they can do for your business, and if you’re sending multiple purchase orders, mistakes are bound to happen. Inputting one number incorrectly can throw your purchase order out of balance, and you may end up paying for more inventory than you wanted.

Good news—QuickBooks Commerce’s inventory management platform is designed to streamline the purchase order management process and can help you avoid costly mistakes.

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Crucial elements of a purchase order

Because purchase orders are important documents, they should be as detailed as possible. Not only will details set the expectations of the order, but they can also be used to verify products if there’s an issue. We’ll take a look at the elements that your purchase order form should include below.

1. Name of the company making the goods or service

Ideally, the purchase order should contain information about the company and vendor you’re buying from. This ensures both parties know exactly who is involved in every purchase.

2. Purchase order number

A purchase order number is a unique string of numbers that allows both your purchasing department and the vendor to track your order. The purchase order number makes it easier to see which purchases were made, which were paid, and which items were delivered. It also helps vendors match your order to what they have in stock to ensure an accurate delivery. Ultimately, a purchase order number makes processing your invoice quicker and minimizes the risk of incorrect payments.

3. Purchase order date

The purchase order date creates an official record as to when an order was placed and when it was delivered. By adding a delivery date to the purchase order, you and the vendor can be on the same page about when it should be delivered.

4. Contact information

Adding the correct contact information, such as a shipping address, ensures all correspondence and deliveries are sent to the right place. It also makes it easier to prevent late deliveries or payments. In addition to an address, this section should also include appropriate emails, phone numbers, and other information that could be useful.

Double-check that the contact details provided are correct since it’ll help you and the vendor communicate now and in the future.

5. Description and quantity of the goods or services

Both a product description and quantity amount ensure no doubling up or incorrect purchases were made. Product descriptions may include model numbers and other specific information, such as an item’s size and color. The quantity will also help you assess whether you received the correct amount once your order arrives.

6. Agreed-upon prices

When you and the vendor agree on a price, it leaves no wiggle room for price increases without your knowledge. Having the price listed on your purchase order also allows you to track pricing history with vendors, and see if it’s necessary to renegotiate or look elsewhere.

Aside from agreed-upon prices, it’s a good idea to also include the grand total, which includes taxes and discounts that may have been discussed.

7. Payment information

Including a section for payment information lets purchasers know exactly where purchases should be made to prevent delays in the purchasing process. Make sure to include credit card and billing address information.

Woman surrounded by boxes holding a piece of paper in her hand in front of a laptop while holding a cell phone in the other.

Why use purchase orders?

While a purchase order may seem like another tedious document, it’s quite beneficial for the overall maintenance of your business. We’ve listed a few ways they can help your growing business, just in case you’re not convinced on why you should use purchase orders.

  • Make orders easier to track : Purchase orders are an important part of record keeping. By creating a purchase order, you’ll be able to track your orders much quicker. Plus, when your order arrives, you can easily check whether you’ve received the correct items and quantity.
  • Ensure clear communication: Since purchase orders are highly detailed, they ensure you and the vendor are in agreement about what’s expected.
  • Make life easier for your vendors: A purchase order helps vendors generate your order and successfully deliver it to your business.
  • Provide legal protection : Purchase orders provide contractual, legal protection for the buyer and the supplier. Without a purchase agreement, you may be left with duplicate orders you didn’t want but have to pay for anyway. It also prevents the seller from making unexpected price increases on your order. Moreover, purchase orders can leave a paper trail, so you can look back at transactions if there’s an audit.

There are numerous benefits of purchase orders that can help your SMB flourish. To make it even easier, you can also automate purchase orders.

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Simplify and manage the purchase order process with QuickBooks Commerce

Purchase orders don’t have to be complicated or something you dread doing. With QuickBooks Commerce, your purchase order creation and purchasing system just got easier.

QuickBooks Commerce enables businesses to:

  • Create and edit purchase orders independently or directly within a forecast report
  • Save, email, or print purchase orders
  • Complete the purchasing workflow quickly
  • Keep a record of purchase orders received or partially received
  • Easily generate reorder reports and automatically request notifications to know exactly when reordering is needed
  • Seamless auditing on all purchase orders generated within the system, regardless of status

With an integrated approach to inventory management, QuickBooks Commerce makes creating and managing purchase orders easily referenceable, trackable, and simple. From the dashboard, you can create, review, and update outstanding purchase orders, with stock levels and preloaded supplier information all in one place. You can also leverage the power of automation, so prices are automatically adjusted to match different quantities as needed.

The purchase order management dashboard enables growing businesses to work smarter, accurately plan for the future, and ultimately, provide a better customer experience. Once QuickBooks Commerce is integrated into your procurement process, you’ll be able to redirect time spent manually creating purchase orders elsewhere.

If you want your time back and want to minimize the risk of human error, use a purchase order system like QuickBooks Commerce. Start using QuickBooks today and see how you can improve the relationship between you and your vendors, say goodbye to time-consuming manual purchase order processes, and grow your business.

For more resources, check out our Guide to POS and shipping options for your small business.

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