Managing stock is one of the more bread and butter tasks of running a business, and purchase ordersare an important way of keeping track of the items you buy.
It’s easy to get confused about the difference between a purchase order and an invoice, so in this guide we’ll explain how to raise a PO – and more – to keep your buyer-supplier relations running smoothly.
What is a purchase order?
A purchase order, often abbreviated to ‘PO’, is an order placed by a buyer to a supplier. It’s a legally binding document which displays a list of what you want to buy, including quantities, the types of products, and the agreed prices for each item.
A purchase order is a contract between the buyer and seller, and when you place an order, you’re agreeing to purchase the goods for the specified price.
What’s the difference between a purchase order and an invoice?
The purchase orderis created by the buyer, whereas an invoice is a bill issued by the seller – this is the key difference. Also, the PO is raised before the purchase, while the invoice is usually issued once the buyer has agreed to a purchase, or after an order is delivered.
Another difference between a purchase order and invoiceis that the former outlines the proposed terms of a sale, whereas the latter confirms the sale and requires payment by a certain date.
What are the benefits of a purchase order?
Some businesses don’t raise POs, perhaps as a way of reducing admin, but there are some potential benefits of using purchase orders that you may want to consider:
- Track your product inventory. If you’re running low on stock, your purchase order gives you a record of the quantity of items you’ve ordered, with a unique PO number which could help you keep on top of the eventual delivery.
- Set expectations. Your purchase ordersgive your suppliers a clear sense of what you need from them, which may increase the likelihood that they’ll have items in stock in the future.
- Avoid confusion. Having your order specified in a document could reduce any mistakes in communication – such as ordering the wrong amount over the phone where you may be misheard or misunderstood, with no proof of the order.
- Flexibility.By raisinga PO, you can set out the exact quantities you need, when you want them delivered by, and you don’t have to pay until a later date when the invoice is raised. Also, a product’s popularity can change overnight, but you can always tweak your purchase orders as demand dictates.
- Legal protection.A purchase orderis a legally binding document once the buyer and seller have agreed to the sale. Having a legal document could protect you if you ever experience a supplier dispute; for example, if you didn’t receive an order you’d paid for.
If you’re a business that receives purchase ordersand issues invoices, many of these benefits apply from a seller’s perspective too. When you receive a purchase order you can track the sales you’ve made, and know that a buyer has legally committed to paying you.
How to raise a PO
The purchase order process is perhaps not as daunting as it may seem at first. Here are some steps to follow if you’re looking to raise a purchase order for the first time:
- You can use Microsoft Word, Excel or other specialist software to start creating your PO from scratch. You may be able to find a purchase order template online – it should look a little like an invoice.
- Include the date of issue and PO number (typically positioned in the top-right). The PO number is a unique reference number that can match your purchase with its eventual shipment, which can help the item arrive safely.
- At the top of the purchase order, state the company addresses of you and the seller (plus your shipping address).
- The main table is where you can include information like the products needed, the quantity, a description and the price per unit – all in separate columns.
- Below this, you can include terms of payment in an additional field, such as the delivery date, and any other requirements. You can also include a separate column to state the total sum of the purchase.
You can then email your purchase order to your supplier – perhaps by saving as a PDF – or ask for their preferred method of receiving the PO.
More from Tyl
There are lots of spinning plates when it comes to running a company, but our articles may hopefully provide some guidance on how to approach your day-to-day realities as a business owner – from purchase orders to marketing. Read more over at Tyl Talks:
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
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