What is a purchase order used for?
Posted on 28th October 2021 at 09:24
A purchase order (PO) is a document issued by a buyer to a seller expressing his intention to purchase from him products or services which he sells or provides, specifying the types, quantities, agreed price, delivery, and payment terms therein. It is an important instrument to validate supplies and pricing and is legally binding documentation of the goods or services that was ordered.
It is used to regulate the purchase of products and services from outside suppliers. In addition to this, a Purchase Order is used to achieve the following purposes.
1. Saves Time
Establishing a purchase order system makes the ordering process simple and a little time taken to create Purchase Order saves a lot of time in the long run. The buyer gets access to various features like a punch-out catalogue and item catalogue available on the website of the vendor. Thus, it becomes easy for the buyer to find products approved for purchase and place an order. Routine orders are created automatically. It becomes easier to check the shipping invoice against the purchase order and verify that the correct and complete order has been received.
2. Helps with Budgeting
Purchase Orders are helpful with budgeting for bulk purchases in the case of large projects. Purchase Orders make it easier to calculate the expenditure likely to be incurred for the purchase of requisite quantities of products and the buyer makes budget allocation accordingly. Previous Purchase records also help to plan for future requirements, budget requirements, etc. It gives an idea about vendors from whom bulk purchases are made and from whom discounts can be sought.
3. Helps in Planning
Purchasing Records give an idea about the performance of an organisation and are useful to forecast and plan for the future. These records provide all the information one requires to examine product trends, market cycle, spending of the organisation, etc. A well-established Purchasing System automatically stores a lot of information, which helps track budgets, receipts, invoices, and more.
4. Handle unexpected Expenses
In large organisations, it can act as an early warning system for expenses not anticipated. When a department places a PO, which it had not planned, the accounts department can easily find it out from the Purchase records where these unexpected expenses derive from and decide whether or not they should be authorised.
5. Eliminate Errors
Purchase Orders provide exact details as to what has been ordered, at what price, under what terms and conditions, and what has been received. It avoids duplicate orders. This document is useful in fixing errors in an organisation and any problem that may come up between the buyer and the seller. It also minimises the chances of any misinterpretation or mix-up while placing an order over the phone.
6. Provides Legal Protection
A purchase order is a legally binding written agreement regarding the price, quantity of items, terms, and conditions between the buyer and the seller and protects both of them. It guards the buyer against unexpected price rises, the wrong type or quantity of items, wrong amount, etc. it also guards the seller against false or incorrect complaints of the buyer.
7. Track and Control spending
The automatic Purchase system helps in keeping track of all the purchases, where purchases are made and whom the money is going. It also prevents unauthorised persons to place orders without clearance. It can also limit which item is to be purchased from which vendor to ensure that orders are placed from preferred vendors only. It provides email notifications and alerts about important details.
8. Understand the Vendor
The purchase order system helps to keep track of the vendors and suppliers and decide which items are to be purchased from which vendor. It enables us to find out which vendor or supplier is easy to work with, which vendor fulfils orders accurately and on time, and help the organisation to prioritise working with preferred vendors only.
9. Improve Inventory management
POs help in inventory management, keep track of which orders should arrive match, and match them against invoice to check the accuracy, thus it becomes easy for the accounts department to approve the payment. It also helps to manage incoming and pending orders.
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