How growing businesses protect their cash flow with proper purchase order management

Whether you’re a small mom-and-pop shop or a large corporation, keeping track of inventory and managing purchases can be confusing. One way to prevent any discrepancies is by using a purchase order. Standard purchase orders outline an order a customer is making from a vendor.

To help you better understand purchase orders, we’ve created this complete guide on what they are, how they work, and how they can protect your business’s cash flow

What is a purchase order?

the definition of a purchase order and a woman looking at a piece of paper.

A purchase order (PO) is a document between a business and a supplier that outlines the products or services the buyer wants to purchase.

Purchase orders include the following information about a transaction:

  • Names of the buyer and seller
  • Type of services or items a business wants to buy
  • Quantity
  • Terms of payment
  • Agreed-upon price
  • Delivery date

Each purchase order comes with a purchase order number that makes it easy to track in the purchase order system. The point of a purchase order is to streamline the buying process to ensure payment and inventory tracking processes run smoothly. 

Sometimes buyers and sellers will use a blanket purchase order. Blanket purchase orders are used for orders that require multiple payments over time.

Are purchase orders legal documents? 

Purchase orders are not legally binding at the time they’re sent. However, once a seller accepts the terms of a purchase order by signing, or otherwise accepting the order in writing, the document becomes a contract. 

Purchase order example 

An example of a purchase order

Purchase orders look very similar to invoices. You’ll find contact information, the date, and the PO number at the top of a purchase order. A table below will list several details about the order in separate columns, including: 

  • Products
  • Quantities
  • Prices 

At the bottom of the purchase order will be the total order amount, the total price, and space for an authorized signature.

Purchase orders vs. invoices

A graph differentiating the difference between a purchase order and an invoice.

If you’re a new small business owner, you may be confused about the difference between purchase orders and invoices. While they both seem like they perform the same function, they’re quite different.

A purchase order is initiated by the buyer. On the purchase order, the buyer makes a list of the goods requested from the seller, whether it’s a product or a service. The buyer also lists the items, model numbers or SKUs, along with the quantity, delivery date, price per unit, and shipping address. The more detail included in a purchase order, the better.

Once a vendor receives a purchase order, they will deliver the items before payment. 

What are invoices?

On the other hand, invoices are initiated by the seller to collect payment. An invoice is a document a seller uses to request payment from the buyer. When a vendor delivers a product or service, they also send an invoice that outlines how much the buyer owes and the payment terms

Similar to how a purchase order has a PO number, invoices have an invoice number. This number is used for tracking purposes for both the buyer and seller. 

For example, let’s say Connor owns a construction business and needs 100 sheets of plywood. He will create a purchase order listing how much plywood he needs and send it to his local lumber yard. The lumber yard will then deliver the plywood and send him an invoice detailing how much he owes and asking for payment.

While purchase orders and invoices differ, they do have some similarities. Both purchase orders and invoices include:

  • Company name 
  • Order details
  • Mailing and billing address
  • Pricing
  • Contact information

In addition, the PO number is usually listed on the invoice as a way to compare what the buyer ordered and what they’re receiving.

Bottom line: A purchase order is the confirmation of the order, while an invoice is the request for payment.

Why do you need a purchase order?

A list of reasons why companies use purchase orders next to a shopping cart holding a stack of boxes.

There are a few reasons why you might need a purchase order. Overall, purchase orders help automate the purchasing process, ensuring nothing falls between the cracks. Explore the main reasons why companies use purchase orders and other benefits below. 

Automates workflow

Purchase orders automate workflows to streamline the approval and accounting process. Having a system that manages purchase orders allows you to better control spending and protects cash flow by authorizing bills or accounts payable only as they’re fully vetted. This workflow can also protect a business from loss through checks and balances. 

Outflow and inflow are also better coordinated—with this automation, the outflow slows down to accommodate the inflow so that your business is not in a net negative. 

You can track this movement with your statement of cash flows. These statements report your business’s receipts and cash outflows for a set period of time and can help you make better decisions about how you spend your money. 

Better budgeting

Creating a purchase order allows companies to manage their budget better. This is because they’ll be able to see what items they need to buy and factor it into their budget to spend smarter. 

With that said, a purchase order helps control expenses and reduces overspending. Additionally, a business can avoid costly bank fees as a result of late payments. 

Faster deliveries

Purchase orders schedule when deliveries need to be made, so by sending them to a vendor in advance, they can ensure your purchase arrives on time. Tracking packages is also easier since it streamlines the process at different shipping stages.

Streamlined auditing

Should financial discrepancies arise, purchase orders create a clear audit trail that documents your purchases for reference if something goes wrong.

Legally binding

Accepted and signed purchase orders are legally binding, giving both the buyer and seller legal protection and peace of mind. 

The buyer is protected once the document is approved, meaning they are guaranteed to receive the items at the designated price point. On the other hand, sellers are protected in the event the buyer refuses to pay. 

Increased transparency

Purchase orders are used by multiple teams within a company, such as the procurement, operations, and finance departments. Purchase orders allow these teams to work together to manage orders and keep tabs on which deliveries are coming in and which ones are pending. 

Sets clear expectations

In a purchase order, companies should clearly articulate what items or services they need, the price point, shipping terms, and the delivery date. This sets clear expectations of what needs to be delivered and serves as documentation for when a delivery doesn’t go as planned.

How do purchase orders work?

Businesses large and small use purchase orders to simplify the purchasing process. Purchase orders are used by businesses to order goods. For example, a bakery might need to order flour and other ingredients in bulk from a supplier. They will use a purchase order to list how much flour and other ingredients they need, along with the price. 

The supplier will then take the purchase order, pull their inventory, and send the goods to the bakery via the preferred shipping method. Once delivered, the supplier will send an invoice asking for payment.

Can a seller cancel a purchase order? 

Yes, a seller can cancel a purchase order. Sellers cancel purchase orders for a few reasons. For example, they might not have the items in stock that a buyer needs. Or they might not agree with the price point a buyer is asking for. 

When this happens, the seller might ask the buyer to make revisions to their purchase order or, if changes can’t be made, the buyer will need to find a new seller.

What is a purchase order number?

Each purchase order comes with a unique purchase order number. PO numbers make it easy for both the buyer and the seller to keep track of delivery and payment. The PO number allows buyers to track their order throughout the entire procurement process. This way, the buyer can ensure they receive the right items or services requested.

Most small businesses start by tracking their purchase orders in Microsoft Excel or purchasing order templates. However, electronic purchase order software makes the purchasing process much easier. With QuickBooks Online, you can track purchase transactions and PO numbers and keep inventory moving.

6 steps of the purchase order process

a graph showing the 6 steps of the purchase order procedure.

Once a purchase order is sent to a vendor, you’re probably wondering what happens next. Below are the steps that take place before, during, and after the purchase order process.

Step 1: Buyer completes a purchase requisition

Before sending a purchase order, a buyer first needs to figure out what and how much they need to buy. A purchase requisition form is a document that the purchasing department typically fills out. This document allows companies to track their expenses and keep tabs on the items or services they ordered.

Step 2: Buyer drafts a purchase order

Once it’s determined what items or services need to be ordered, a company creates a purchase order form. The purchase order will include contact information, the date, each item’s price, quantity, and PO number.

Step 3: Vendor accepts or rejects the purchase order

In the next step of the PO process, the vendor has the option to either accept or reject the purchase order. Once the seller accepts and signs the purchase order, it becomes a legally binding contract. If it’s rejected, the seller might ask the buyer to make revisions or the buyer might have to find a new vendor.

Step 4: Seller fulfills the order 

Once the seller accepts the purchase request, they will begin fulfilling the order by taking out the inventory or scheduling staff.

Step 5: Seller delivers order and provides invoice

The seller then delivers the products or services to the buyer, along with packing slips to keep track of what was delivered. Along with the delivery, the seller provides an invoice with the appropriate PO number to match the delivery information.

Step 6: Buyer makes payment 

After reviewing the invoice, the buyer will then pay for the products or services they received. The payment should have already been agreed upon between the buyer and seller and a payment due date established in the purchase order.

Simplify your process with purchase order management 

Purchase orders are a great tool for recordkeeping, as they document the goods and services a buyer needs from a vendor. Companies use purchase orders to send order details to a supplier to ensure they receive the right products or services by the expected delivery date. Purchase orders also help with inventory management, as they allow companies to see what inventory may be running low.

Creating a purchase order is simple, especially when using an electronic purchase order system. With QuickBooks Online and QuickBooks Payments, you can manage orders and invoices, accept payments like credit cards, and more. Learn how QuickBooks can help your small business today.

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