It is tempting to write a piece of paper and hand it over to your supplier or text details to him – but trust us, it is a very bad idea! What if he forgets? What if you forget? Get rid of these habits and start using a formal Purchase Order.
What is a Purchase Order?
A Purchase Order is an official document issued by a buyer to a seller. It defines
- types, quantities, and descriptions of the products ordered
- agreed prices, discounts, payment terms, etc.
- date of shipment, other associated terms, and conditions,
- a specific seller who will be fulfilling this order.
A purchase order is one of the best tools you can use to manage your inventory better.
Once the purchase order is accepted by the vendor, it becomes a legal contract binding you and the vendor.
Purchase Order- Terms And Conditions
For a purchase order to be considered valid, you need to include these elements:
- Item of purchase: You need to mention the item of purchase with its detailed description.
- Quantity: Mention the number of items that you have ordered for purchase – this helps with better inventory management.
- Details of supplier: Clearly mention the name of the supplier and other details related to him.
- Details of payment: Mention the mode of payment and its status (whether pending or paid).
- Price of products: Accurately mention the price of each product that you are purchasing.
Purchase Order vs Invoice
A purchase order is a legally binding contract between you and your vendor. You use it to agree on a set number of items for a set price. A purchase order also doubles up as an intimation to your vendor that you need products.
An invoice, on the other hand, is proof that purchase is complete, financial obligations are met, and taxes are accounted for.
An invoice is often generated upon completion of the sale, or a service. A purchase order is generated when you need more inventory items from your vendor.
Why should one raise a Purchase Order?
Surprisingly, many small businesses avoid using purchase orders as it is seen as a hassle by many. For the same reason, their inventory management goes haywire and they face losses. Understand the significance of this document and use it correctly for your business. Here’s why:
You gain clarity in your patterns of expenditure
By creating a purchase order each time you make a purchase, you will have a clear idea of how much and particularly on what you are spending the most. This helps you buy more of the product that gives you more sales and vice versa.
Capture all details in a single document
Retailers who don’t use purchase orders use separate files for quantity and items, pricing, shipment details, etc. This can be avoided by having one single document that specifies all of these and hence is extremely convenient.
Accounting will be accurate and clear
In the purchase order, the retailer will be able to mention the price of each item and the total price. He will be able to mention the payment mode and the status of his payment.
Mostly, when retailers buy in bulk from vendors, they pay in installments. So, the retailer can mention in his purchase order, the amount that is pending and the amount paid. This gives him an idea of the expenses involved.
You can track the items received
You can easily track the items that you have received and the ones you are yet to receive. Hence, you can avoid confusion in this regard.
Rectify mistakes sooner
Once you create a purchase order, you have solid proof for what you have ordered. No more goof-ups from the supplier’s side can affect you.
If you order for 40 items from your supplier and he asks you to pay more while it actually gets delivered because ‘the prices have gone up’, you have a chance to deny that request since the price mentioned in your purchase order will be the final one.
The team receiving the products when delivered might not be the same team that placed the order. If you only place orders over the phone, your operations get messed up over time.
Many suppliers need you to notify them of shortage in items delivered within 24 hours. This might not be possible without a purchase order as there will be no method to instantly cross-check whether you have received the actual number of goods you have ordered for or not.
Use product history for better business strategies
With purchase orders, you will have an account of the number of items you sold and those that gave you more/fewer sales, the supplier from whom you bought a particular item and so on. This can help you a lot in planning your next purchase.
E-procurement is the best choice
Using efficient software to get your accurate purchase orders is the easiest thing you can do. Rather than writing it down in a book, get an automated version of the purchase order which will give you every minute detail related to your transaction.
Related Read: 5 ways you can go green as a retailer
When should one raise a Purchase Order?
The perfect time to raise a purchase order is determined by the reorder levels and lead time. You need to raise a purchase order at that point when you have just enough stock of a product to last until the next replenishment. This calculation, known as the reorder point, uses this formula.
Reorder Point = Average Daily Usage Rate X Lead Time
Some people also add their safety stock to this number to be able to hold as little stock as possible.
Make your purchase-to-pay process much simpler and far less time-consuming. Start using purchase orders.
Using an inventory management system to automate purchase orders can help you manage your business with one less thing on your mind.
Primaseller is neat and easy to use purchase order software. We help you manage your inventory easily and process orders. You could check out our free trial to see if it can solve your Purchase Management problems.