For running any business, you either need a product or a service. For that, you connect with suppliers and place your requisition. They fulfill your requirement, and you make the payment. Well, it sounds quite easy! But in the practical scenario, things are way more complicated than this. There might be several unforeseen problems like issues with the payment, miscommunication, short supply, etc., that might result in delays.
So, to make things more organized and to maintain proper records by both the buyer and the seller, the concept of purchase order has been introduced.
What is a purchase order?
Commonly referred to as PO, a purchase order is a legal document that is sent to the vendor or supplier of a product or service for authorizing any purchase. Each PO will contain a number that will help track the purchase order and other associated details like the type of item, pricing, and quantity.
Such a process helps small businesses in keeping their business operations more efficient and organized. It ensures delivery of the requested goods or services before committing fulfillment of the order. This provides adequate time for the buyer to plan accordingly.
Also, properly maintained POs help in maintaining proper records for both the buyer and the seller for the preparation of financial statements and auditing purposes.
Benefits of using a purchase order
In the absence of any agreement between the buyer and the seller, a purchase order can be legally binding when signed by either party. A purchase order is beneficial in the following situations –
- Tracking of the payments made to different vendors.
- Maintaining records for auditing purposes.
- Tracking of large orders.
- Using it as a reference for specifying the terms agreed upon by the parties to the PO.
For understanding the template of purchase orders, you should note that different types of purchase orders have their format. While the basic information might be similar to all purchase orders, the template varies greatly.
The four different types of purchase orders and the information included in them are –
- Standard purchase order
These are the most commonly used POs where the buyer is clear with the order’s details such as the item or service required, the quantity, delivery schedule, and the payment terms. However, such a PO is prepared based on the different functions and needs of the buyer.
For example, if a business requires printer cartridges, a standard PO may be generated as the buyer knows the required quantity and when required. It may also include details on the service to be rendered, consignment and subcontracting details, etc.
- Planned purchase order
This is usually prepared by the buyer in advance at the time of estimating the future needs of the business. While the details relating to the product, pricing, and payment terms are available, the quantity is determined based on estimation, and the tentative delivery date is decided upon.
For example, if the same business needs printer cartridges and prepares a planned PO, the buyer would need to provide the estimated quantity required with a flexible delivery date.
- Blanket purchase order
This type of purchase order is prepared for placing multiple orders to avail discounted prices for the product or service.
For example, if the same business is looking to procure printer cartridges for a better price, the buyer should place multiple orders in single purchase order and place it with the supplier.
- Contract purchase order
This is the most formal purchase order among the variations. Both the buyer and the seller will sign a contract specifying the purchase terms before the PO is issued. This kind of PO legally binds all the parties involved.
For example, if the same company in need of printer cartridges signs a contract with the supplier mentioning the quantity, pricing, and delivery terms for the items to be purchased followed by a standard PO, it will be termed as a contract purchase order.
The general format
For ensuring that the purchase order you have created is properly drafted, include the following information –
- Header: This includes the name of the company, company details, address of the business, PO date, and the order number
- Vendor information: This indicates the recipient of the PO. Here, the name of the seller company, any contract name, and address of the seller is included
- Ship to: This specifies the address where the order is to be shipped. It includes information on the shipping method, the terms of shipping, and the intended date of delivery
- Order details: There should be a line item including the product code, name of the item and description, price per unit, quality of unit asked for, and the delivery date for each product in the order
- Summary: The PO should summarize by providing the subtotal, any taxes, discounts, shipping cost, and the grand total
Making an order in Microsoft Word or Excel
- Open an MS Word document or a Microsoft Excel sheet and click on the MS Office icon at the top left corner of the screen.
- Choose “New” from the drop-down list.
- From the list of templates that appear, select “Purchase orders”
- If you cannot find the “Purchase order” option, select installed templates. Type “Purchase Order” in the dialogue box that appears
- From the different types of purchase order templates that appear, choose the one that best suits your needs
- Fill up the spaces with relevant information such as the company name, logo, etc., to a better idea of how much to budget for the project
The steps outlined above are quite easy to follow, and the templates that will be created will require minimal formatting to prepare your purchase order. Having a proper PO in place helps in the smooth and efficient functioning of the procurement process and mutually benefits both the buyer and the seller.