Every aspiring entrepreneur knows the value of organization and clarity in their operations. At the heart of many business transactions lies the purchase order, one of the must-have documents to keep production and selling going.
In this blog, we will provide an introduction to purchase orders, including what is a purchase order, how a purchase order works, purchase order process, and free solutions and templates for purchase orders that you can consider.
Purchase order definition
Let's start with the fundamentals. When we ask, "what is a purchase order?" we are referring to an official document that businesses use on a daily basis.
In its simplest form, a purchase order (often abbreviated as PO) is a document sent by a buyer to a seller. It specifies the details of the products or services they wish to purchase. Think of it as a formal note stating "I want to buy this from you."
To provide an example, let's imagine you own a café and need coffee beans. You would send a purchase order to your coffee supplier, specifying the type, quantity, and agreed price of the beans you want to buy. This is how the purchase order process works.
Now, if you're wondering about the difference between a purchase order vs. invoice, it is quite straightforward. While a purchase order indicates the intent or request to buy, an invoice is a request for payment sent by the seller after the order has been delivered or the service has been provided.
When issuing or receiving a purchase order, here are some fields you should look out for:
Details about the Buyer and Seller: This includes names, addresses, and other contact information.
Purchase Order Number: A unique number that helps both the buyer and seller track and manage the order.
Description of Goods or Services: This includes the type, quantity, specifications, and any other pertinent information about what's being ordered.
Price and Payment Terms: The agreed-upon price for the goods or services, along with terms for payment (e.g., net 30 days, upon delivery, etc.).
Delivery Details: This includes the delivery date, shipping method, and delivery location.
Terms and Conditions: These could include penalties for late delivery, warranties, and other terms both parties agree upon.
Signatures (in some cases): For certain transactions or companies, a signature may be required to validate the PO.
Using purchase orders is necessary and beneficial for your business:
Control and Budgeting: Purchase orders allow businesses to better track and control their expenditures. It’s helpful for both the buyers and the vendors.
Legal Protection: In case of disputes, a PO can serve as a legal record of what was agreed upon between the buyer and the seller.
Efficient Record Keeping: Purchase orders help in maintaining a clear record of past purchases, aiding in inventory management, accounting, and forecasting.
Clarity and Reduced Errors: By clearly specifying the details of the purchase, POs help in reducing misunderstandings and potential errors in the order process.
After a purchase order is issued and accepted, the seller will then deliver the goods or services and typically send an invoice that should match the details of the PO. If there are discrepancies, they can be addressed based on the details laid out in the original purchase order.
How does a purchase order work?
A purchase order, often referred to in industries as simply PO, is more than just a document—it's a structured commitment. In general, buyers and sellers will go through the following steps.
Initiation by the Buyer: When there's a need for goods or services, the purchase order process begins. A purchase order form, sometimes pulled from a digital purchase order template or an excel purchase order template, is drafted. This can be done using purchase order software or manually for smaller operations.
Review and Approval: Accuracy is key, as a purchase order is a written commitment. Each purchase order, whether it's a sample purchase order for internal review or the final version, might undergo scrutiny. Larger firms might use their purchase order system to get hierarchical approvals, ensuring that details like the purchase order number align with tracking requirements.
Sending the PO: The approved purchase order is sent to the vendor. With the rise of technology, many prefer a digital purchase order method, while some still use traditional channels. This means the vendor might expect to receive the purchase order as an attachment in an email or a DocuSign link, indicating that the purchase order is awaiting signature.
Vendor Acknowledgment: Upon receiving the PO, the vendor reviews this purchase order and ensures it matches their supply capabilities, stock levels, and product availabilities. Acknowledging signifies a mutual agreement. Still, in most cases, a signature is required to officially acknowledge and settle the purchase order.
Delivery of Goods or Services: The vendor then works based on the purchase order form, ensuring timely delivery as per the specifications. During these processes, vendors often provide tracking codes, reminder emails, or other methods of notification to keep buyers informed about the whereabouts of their goods.
Invoice and Payment: Here's where many get confused with terms like "invoice vs purchase order”, "purchase order vs invoice", or “sales order and purchase order.” Simply, after the goods are delivered and received, the vendor sends an invoice to pay. It's essential to verify this against the initial purchase order. If they match, payment follows.Of course, some vendors require a certain amount of payment before the goods are shipped. This requirement should be included in the purchase order and agreed upon.
Record Keeping: Maintaining records, especially in a purchase order management system, aids in tracking past orders using the purchase order number. Both parties keep copies, which can be vital for scenarios like purchase order financing or for audit trails. To simplify searching and record-keeping, an increasing number of companies are opting to digitize their purchase orders instead of relying on pen and paper.
How does a purchase order template look like?
The purchase order process might seem daunting, but with a clear template for purchase order, it becomes straightforward. Here's what you typically find on a standard purchase order form:
Header: This features the company's logo and prominently displays the title "Purchase Order." An essential part of this section is the unique purchase order number, crucial for tracking and future reference.
Buyer & Seller Information: Here, you'll detail both the buyer’s and the vendor’s names, addresses, and contact information. This is pivotal for clarity in the purchase order vs. invoice comparison later on.
Order Details: This segment lists the items or services being ordered. You'd typically see a description, quantity, unit price, and the total. It's not uncommon for businesses to pull these details from an excel purchase order template or even a free purchase order template available online.
Shipping & Terms: A brief section that specifies delivery information and conditions of the purchase. It can also differentiate elements when contrasting sales order vs. purchase order.
Total Costs: Beyond just the cost of items, this section will outline taxes, additional fees, and the grand total. This plays a significant role when examining purchase order financing.
Signatures & Dates: Signifying agreement and intent.
Many businesses today are transitioning to digital purchase order systems, valuing the efficiency and clarity they bring. Whether you're examining a sample purchase order, considering purchase order software, or diving into purchase order management, understanding the look and feel of a PO is foundational. As you grow your business, knowing the difference between, say, an invoice vs. purchase order or mastering the use of a digital purchase order can streamline operations and set you on the path to success.
How to create purchase orders?
Navigating the waters of business operations can sometimes feel overwhelming, especially when paperwork starts to pile up. Traditional paper-based methods can become inefficient as your business grows. As a result, more businesses start generating digital purchase orders for speed, efficiency, and convenience.
So, how can one transition to creating purchase orders digitally and expediently? Here's a step-by-step guide:
Choose the Right Software: The market is awash with a variety of purchase order software, ranging from dedicated platforms like QuickBooks' purchase order features to comprehensive enterprise solutions. If you just just getting started, consider free yet agile tools and solutions that help you manage your purchase orders digitally without having to spend a month learning how to use the tool. For example:
Lark Base: When using the document generating application embedded in Lark Base, your business can easily enter a new purchase order and generate a well-organized, formatted PDF for signing. Additionally, all the purchase information can be easily located and traced within Lark Base. The best part? It's free to start.
Excel (Or Google Sheets): Excel remains a powerful tool for creating purchase orders, especially for businesses that are just starting out. You can add various fields, format the table, and print it easily. However, it could be challenging managing multiple sheets simultaneously and trying to differentiate between different orders by following a strict naming pattern for all the files.
Word (Or Google Docs): Word is another commonly-used tool to print and fill purchase orders, with a lot of free purchase order templates to choose from. Still, businesses sometimes might run into similar issues keeping track of all purchase order documents.
Auto-fill Features: With digital tools, repetitive data entry becomes a thing of the past. Once you input vendor details or item specifications, modern software can remember and auto-fill these details for future orders. This feature significantly reduces the time taken to create a new purchase order. If you just start your business, consider using free tools with automation that can help you auto-fill such information, such as Lark Base.
Use Templates: One of the perks of going digital is the access to various digital templates. Platforms often offer a range of free purchase order templates or excel purchase order templates that you can customize according to your business needs. This reduces redundancy and ensures consistency across all your purchase orders.
Integrated Systems: Integrating your purchase order system with your everyday collaboration tool can efficiently reduce the need to switch between different apps. For instance, with Lark's integration with DocuSign, businesses can generate and sign documents in a streamlined manner. You can also explore deeper integration, such as receiving notifications when your purchase order is returned and sealed.
Digital Signatures: Gone are the days of printing, signing, scanning, and then sending. With digital purchase order systems, e-signatures can be appended instantly, ensuring swift approvals and dispatch.
Instant Sharing and Notifications: Digital platforms often come with the feature of instant notifications. Once a purchase order is created or modified, relevant parties can be notified immediately via email or integrated communication tools.
Safe Storage and Easy Retrieval: Digital storage means no more bulky file cabinets. Purchase orders can be safely stored in the cloud or on servers, ensuring they're safe from physical damage. Retrieval is also a breeze with search features.
Does my industry and business need to use purchase orders?
The short answer is Yes. As long as your business is dealing with business-to-business (B2B) transactions in any part of your profit chain, you will need to deal with purchase orders day in and day out. Here are some industries that frequently uses purchase orders.
Manufacturing: Here, raw materials are continuously needed. A purchase order ensures that these materials are requested in precise amounts, maintaining efficient production. Systems can range from purchase order excel templates or more comprehensive purchase order software manage these orders seamlessly.
Retail: Effective purchase order management is what enables your favorite store to always have what you need.Retailers use purchase orders to request goods from suppliers, ensuring shelves are always stocked.
Construction: When building, every brick, tile, and nail matters. Purchase orders are used to requisition these materials. Whether it's a digital purchase order system or a simple purchase order form, they ensure that the right quantity of materials reaches the site on time.
Hospitality and Food Service: Hotels and restaurants need a steady supply of food items, cleaning agents, and more. By sending a purchase order to suppliers, they ensure the uninterrupted service we enjoy.
Healthcare: Hospitals and clinics require medicines, equipment, and other supplies. A purchase order ensures that these are procured in the right amounts, maintaining the health and safety of patients.
Government: Governments at all levels use purchase orders to request goods and services from vendors. This brings transparency and accountability to public spending.
In all these industries, a purchase order serves as the cornerstone of organized, systematic procurement. It brings clarity, legal safeguards, and structure, be it through a template for purchase order, a purchase order number system for tracking, or through sample purchase order forms to ensure consistency.
Whether you’re a business magnate or a start-up enthusiast, knowing the details of the purchase order and the purchase order system you use can contribute to efficient operations, minimized errors, and a streamlined procurement process.
Why is a correct, up-to-date purchase order important?
Imagine placing an order for 10 chairs but receiving 100 because of a typo in the purchase order form. Such errors can be costly and disrupt your business flow. This is why having an accurate and current purchase order is important for businesses large or small.
A purchase order serves as a legal record of items or services requested, making it easier to manage inventory, finances, and disputes, if they arise. A correct purchase order also helps in streamlining the purchase order process.
Digital purchase order systems, like Quickbooks purchase order management or other purchase order software that large companies use, offer tools for generating and tracking orders efficiently.
So whether you’re looking at a digital purchase order or a traditional purchase order excel, accuracy remains paramount. Many entrepreneurs make use of a free purchase order template or an excel purchase order template to ensure that they're not missing out on any vital details.
Understanding the importance of purchase orders and how to create them is crucial for the efficient operation of any business. By utilizing digital tools and templates, businesses can streamline the purchase order process, reduce errors, and improve record-keeping.
Whether you're just starting out or looking to enhance your current purchase order management system, the Lark team is here to help. Contact us today to learn more about how Lark Base can assist you in managing and streamlining your business from day one and help you take control of your operations for growth.