Everything you should know about purchase order management
Let’s walk you through purchase order management so you’ll learn about the overall process, it’s benefits, and how you can optimize it in your business.
What is a purchase order?
A purchase order is a legally-binding agreement sent from a buyer to a supplier, authorizing the purchase of goods from the seller, essentially outlining the expectation of the business transaction.
It is ideal to protect both parties involved in that the seller is covered if the buyer refuses to pay, and conversely, it protects the buyer if the seller refuses to deliver their products or services.
Purchase requests vs. purchase orders vs. invoices vs. receiving documents
Purchases orders and invoices are similar in some regards, but the intent of each document is different.
Both contain legally-binding details about the order and the mailing information, although the invoice also includes the order price, payment terms and conditions, and the date the payment is due.
However, the key difference is that while an invoice requests the payment for an order, the purchase order simply confirms that an order has been placed.
In addition, the purchase order is created by the buyer when they order the product or services, and the invoice is created by the seller to request payment for those products or services and is usually sent after the order is completely shipped.
Purchase requests, on the other hand, is an internal document provided by the buying party’s inventory and product managers to be approved by the appropriate staff or department (such as accounting/finance) into a purchase order. The purchase request is converted to a purchase order once it is approved.
Receiving documents are utilized when a purchase order is delivered to the buyer and an invoice is received. The warehouse it is received in will count the products and match them on a receiving document against the original purchase order and invoice. This creates a series of documents that account for every step of the way, ensuring all products were delivered as promised, they are in selling condition (meaning no defects, damage, etc.), and the prices charged on the invoice match those agreed on the purchase request.
What are the overall benefits of using a purchase order system?
Easily verify information such as when and what purchases were made for a particular purchase order. This helps you track incoming orders, price changes, avoid duplicating the order, and coordinate effectively with your suppliers/vendors.
Your time is often on short supply. Once you have an effective purchase order management system, all you have to do is go in, find approved products for purchase, and place the order.
A proper inventory management system will allow you to repeat this process or even automate it, but that’s more advanced stuff we can cover over a phone call!
Accurately Manage Budgets
Since you’re tracking the quantity and costs of everything you purchase, this is the base point of comparison to your retailing price (or MSRP) where you determine your mark-up and profit.
As mentioned, purchase orders are legally binding documents that once the seller accepts puts responsibility on both parties to deliver on the goods, services, and exchange of money.
Increasing Inventory Turnover
Ensuring your products don’t sit in inventory too long is crucial to your overall success. Your inventory might lose demand, value, and quality over time, so it is ideal to sell it as fast as you receive it.
Getting a handle on your purchasing procedure will help you accurately determine your inventory turnover, which you can then strategize ways to adjust your purchasing schedule or quantities to increase the turnover rate.
What information is contained within a purchase order document?
Although different retail verticals or product types may require supplementary information, this information is generally found on just about any purchase order:
- Name, address, and contact information of both the buyer and the supplier
- Products and services being purchased, including quantity of each
- Purchase order number
- Price per unit (or cost per unit if you are the buyer)
- Delivery date and location
- Agreed upon payment terms
- Terms, conditions, and additional instructions
What are the best practices that ensure you save time, money, and energy when it comes to purchasing?
Keep employees looped in
Ensure your staff is fully trained of the procedures, policies, and expectations when it comes to the approval and purchase order management process. It is ideal to create a guide that can serve as a reference to outline the ground rules for specific purchasing scenarios.
Track your vendors
Another important best-practice is to track who you’re purchasing your inventory from. Create a directory list of your various suppliers that includes all necessary details to submit a PO to them. Information such as their address, payment terms, prices, and even a rating as to how reliable their services are.
Digital transformation of inventory management
Finally, you should definitely consider “digitizing” your purchasing and inventory management with a POS/ERP solution such as NCR Counterpoint.
Counterpoint continues to be the leading point of sale and inventory system. We help businesses nationwide implement powerful inventory solutions and automation.
There are tons of benefits to implementing a proper inventory and purchasing system, talk to our consultants today to see if we’re a good fit!