Purchase orders explanation
A purchase order is an important part of record-keeping and cash flow management for businesses of all sizes, though they are most often used by very large businesses, such as schools, governments, universities, factories, and hospitals.
If your ecommerce shop supplies t-shirts for a university sports team, for example, it’s likely that instead of buying them directly on your online shop, they will want to send you a purchase order and pay via invoice.
Purchase orders vs. invoices: What’s the difference?
It can be helpful to think of a purchase order as the opposite of an invoice. Customers send purchase orders to request the provision of goods or services. After the goods or services are delivered, the supplier sends an invoice to request payment.
An important thing to note about purchase orders, particularly if you are the supplier, is that they function as contracts and are legally binding once they are accepted by the supplier. What qualifies as acceptance (signature, online ok, etc.) will be different depending on where you and your customer are located.
Why purchase orders are important for your business
In an ecommerce context, all orders are purchase orders. When business is done with an individual, their immediate payment is what guarantees the order. In a B2B context, it’s the purchase order that provides the guarantee.
One of the first lessons ecommerce business owners learn is the importance of inventory management. The larger your customers’ orders are, the more useful purchase orders can be in helping you plan what sort of inventory you’ll need at any given time.
Types of purchase orders
There are a few different types of purchase orders. To understand the difference better, imagine you work for the procurement department of a large insurance company and it’s your job to make sure there are enough paper towels, napkins, and toilet paper.
Standard purchase order
A standard purchase order is used for non-recurring or one-off purchases, so items that either won’t need to be replaced for a very long time or things for a one-time event like a company’s 50th anniversary. You might use a standard purchase order to buy special gold napkins and paper cups for the anniversary party.
Blanket purchase order
A blanket purchase order is used to buy goods and services from vendors without necessarily specifying the quantity, delivery schedule, or even price. You might use a blanket purchase order as an umbrella for everything the company needs to buy for the 50th-anniversary party.
Planned purchase order
Planned purchase orders are long-term agreements to buy things without specifying the delivery schedule. In our example, this would be the yearly supply of toilet paper, napkins, and paper towels. Since you don’t know exactly how much you’ll need, you would make a rough estimate, then each monthly delivery is redeemed against the existing order. If the purchase order value is reached before the end of the year, then a standard order can be issued for the remainder.
How purchase orders work in ecommerce
The holidays are coming and you want to make sure you have enough inventory for the busy season. You create a purchase order detailing which items you want, the quantity, and when you want to receive them.
You send this order to your supplier and, after checking they are able to fulfil the order, they approve it. If the schedule calls for immediate payment, then you would pay them. Otherwise, you pay according to your agreement.
Your supplier then fulfils the order, delivering your items to your warehouse in time for the holidays. You check the items against the purchase order to confirm you received everything you asked for, and the supplier sends you an invoice for the items.
How to create a purchase order
Purchase orders typically follow a standardised format. As mentioned above, many purchase order systems can introduce automation to the process of creating an order. If you are a small business and don’t have a dedicated PO system, your accounting software should have a template. Failing that, both MS Word and Excel have templates you can use.
When creating a purchase order, it is important to include all relevant order details a supplier will need. This includes what is being ordered, including SKU numbers and the quantity of items needed, delivery date, billing address and payment terms. Purchasing departments usually also include a purchase order number (sometimes referred to as a “PO number”) for ease of reference later on.
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