Purchase Order

Purchase order fundamentals are basically straightforward. A purchase order is usually a numbered document issued by a buyer to a seller. The details of the purchase are listed specifically as to item, quantity, price, expected delivery date, price per item, and a not-to-exceed-total. The company person who has the authority to make purchases places the order. This document can be used by either party (buyer or seller) to cover them in the case of a dispute. It is therefore important that all pertinent information be included in the PO (purchase order).

There are many types of purchase orders, which are in use in modern business. These include PO’s, which are faxed, sent via email, mailed or phoned into the seller. All of these are binding on the buyer and represent a good order to the seller. They cover such details as a blanket order to be filled over time or a one-time purchase. A PO can state how the order is to be shipped and what date it needs to arrive. Any special details of the order should be spelled out in the PO.

The number associated to the PO is unique to the order. This number can be of help when trying to find out what happened to a missing order. This PO number and the shipping details can be cross-indexed easily. This indexing makes it simple to find out which order was shipped, when it was shipped and how. Most businesses that buy and sell from distant vendors use this system to keep orderly records of purchases.

Record keeping and inventory control is a major concern for all businesses which do a large amount of buying and selling of merchandise. Without good records, a business can very quickly get into a morass of paper, which makes little sense. PO’s help to keep this problem under control and inventory levels at efficient levels. Tracking down lost or delayed orders can be difficult to reconcile without adequate information. Purchase orders are useful in this area and many others.

This type of purchase control lends itself to keeping mistakes at a minimum. Using PO’s can prevent A thousand widgets delivered when you only wanted 100. Keeping on-time inventory levels can be maintained with the use of PO’s. Is it any wonder that businesses use this form of purchase control in most industries? This method of purchasing is a time saver, reduces errors and is very efficient to run. PO’s can be used as documentary evidence when there is a dispute as to a problem with a purchase. The PO detail will make the intentions of the buyer perfectly clear in a well-written purchase order. This piece of paper caused the order to be shipped and the conditions under which it was purchased. A PO by itself could resolve many disputes as it preceded every other event in the chain of a delivered order. A delivered order with a mistake in it would be very easy to confirm when it was the result of a purchase order. The ease with which a purchase order can be generated is one of the reasons for their popularity. They can also be completed at a quiet time and not in the midst of a chaotic time. Hence there will be fewer errors and the gain of efficiency.

There are real financial gains to using a PO. These entire factors make PO’s a long accepted practice in the business-world. Most companies have stringent guidelines about the release of a PO and who within the company can do it.

The receiver of a purchase order also may have set rules about relying on PO’s and making deliveries based on them. It is wise that both parties know the others PO practices.

Faxed or emailed purchase orders are the most commonly used in the business community. The next would be phoned or verbal purchase orders. Mailed may be the last choice due to the slowness of mail. Some companies use this means to confirm a verbal PO. Fax or email is used because it is quick and can be confirmed back just as quick. Some companies use this method to follow up a phone order. In any event, this process starts the order and has all of the legal binding of a personally handed PO. Signatures on any of these documents would be considered valid.

One advantage of an emailed PO is that it can request a return receipt of the email. This lets the sending party know that the seller’s computer received their order. Faxed PO’s are used for several reasons, one being just that it has been done this way since the advent of the fax. Another is there is an immediate paper trail of the order. The original PO is in the possession of the sender. A confirmation can also be requested by the buyer. Any questions about the order should be resolved at this stage. An amending PO should be sent if there is new detail to be added or clarified. This is the right point in time to make sure both parties are in accord to the PO.

Blanket PO is for a series of purchases up to a certain dollar amount and good for a specified time frame. These PO’s are used when the buyer knows there will be the need for further purchases of similar items during a certain time period. They are used to maintain project budgets and control. This PO saves time and does not create unnecessary paper work. Blanket PO could also be used to send the same order to more than one address. Again, negates the need for separate PO’s,

Typical paper trail of a PO is very likely to follow this path. There is the need for something to be purchased by the business. This could be a new computer or several items for a current project. It does not matter what it is, only that it needs to be purchased. The item is found by the purchasing dept of the company and a PO is generated, to be sent to the supplier. This will be done by one of the methods previously discussed. The seller receives the PO and verifies that this company is authorized to purchase in this manner. The order is filled and the shipping instructions are indexed to the PO. The order is shipped and the buyer checks the packing slip with the copy of the PO in his possession. When every thing checks out, the PO can be marked received and forwarded to accounts payable. A check is cut to the supplier according to the terms that the buyer and seller have agreed to when setting up the account. The record of the purchase has done its job and the PO can be now filed as completed.

A search via any good search engine will result in many software answers to computer-generated PO’s. Some of these are very robust programs, which go far beyond just writing a purchase order. They provide tracking and a complete information trail as to what happened to the purchase. These systems are complete and stand-alone software packages. There are other ways to do this, but these software packages are efficient and well thought out.

Templates for both Microsoft Word and Excel can be found on the Internet. These templates allow a buyer to use the existing software to create PO’s. A template of this nature makes designing a workable purchase order form easy. The largest part of the work has already been completed. Changes can be made, but may not be necessary.

A purchase order is considered a legal document and is binding on the buyer if the seller delivers as agreed. Errors, which were in the purchase order, are not the fault of the seller. This is why the wording and the factual content are so important in the PO itself. It is prima fascia evidence of the intent of the buyer and the response by the seller. If a seller cannot fulfill the terms of the PO, the buyer should be notified immediately upon receipt of a new PO. The buyer by submitting a purchase order has agreed to pay up to a certain total of money when the seller makes good delivery. The seller by accepting the PO has agreed to deliver as outlined in the PO. Warranties can be included in a purchase order. If accepted by the seller, the PO will have a binding effect of the seller. For this reason, a PO should be tightly written and spell out any important contingencies.

If a dispute arises about a purchase, the purchase order will be critical in the determination of who is the offending party. This is one of the basic reasons a PO is used as it puts in writing what the buyer intended to purchase and what the seller actually delivered. A verbal order with no paper backup can bring about a difficult situation. The resulting dispute will come down to a he-said, he-said argument. Without a PO this would be very difficult to resolve in either party’s favor. Be safe with a written PO, than sorry for the lack of one.

Purchase order policies are standard in any well-run company. . Like many areas of possible dispute, most companies put in writing how purchases will be made. They define dollar limits for purchases. Who has the authority to make purchases in the company’s name? What type of PO will be used and how a paper trail will be instituted. They may suggest that all purchases over a certain dollar amount must be routed through the purchasing department. Legal staff will have looked at the purchase order very carefully and any ambiguity will be eliminated if at all possible. These policies are put in place to bring order to the process of purchasing and eliminating wasted effort and lost company time. The generation of a PO is a step toward making employees accountable for their actions while purchasing items for the company. These policies can be extremely tight for complete control to relaxed use of verbal PO without a paper backup.

The large companies will usually be using some version of software to maintain tracking of purchases. Small companies could be using templates of basically notes to run their purchasing trail. The bottom line is some form of record keeping is put in place and these records can be looked at later to see if a project is being handled properly and smoothly. These records can help in planning a new project or predicting the cost of a new job. This real time value of pertinent data makes business projections more accurate. Making policy and enforcing it will take possible chaos out of company purchasing and creating useful information, which can be used in the future.

Sellers appreciate the use of PO’s, because the PO brings clarity to an order. Any order can be reduced to its essential components and leaves little room for error. Misunderstandings between the seller and the buyer as to what is being bought, quantity, price and shipping are reduced to a written order. Unclear situations can be fixed before shipment. Removing possible mistakes in orders delivered is good business. No supplier wants to deal with irate customers who have been shipped the wrong item or the wrong quantity. This is particularly relevant, if the customer is running his inventory on a just in time basis. Freedom from preventable errors is a major reason to use written PO’s. Items delivered properly based on a binding PO are like money in the bank to the seller. If the buying party makes a PO mistake, the error in delivery is his fault and not that of the seller. Granted, a smart seller will make it right to a good customer, but this need not be done due to a liability resulting from an error in product delivered. Making good errors is just a smart idea in customer relations. Reducing orders to written form is far better than verbal PO with no follow up PO by either fax or email.