What Is a Purchase Order & How Do They Work?
Purchase orders are a key part of your inventory management system, allowing you to order supplies as you look at your empty shelves, knowing precisely what you need. It’s usually simpler than travelling to the wholesaler or supplier because once you’ve left your business, even with an order list in your pocket, it’s easy to forget things and make mistakes.
So today, we’ll be going over everything you need to know about purchase orders, including:
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What is a purchase order?
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What advantages are there to purchase orders?
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What do you need to include on a purchase order?
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When should you place your purchase order?
Once you’ve got the answers to all of these questions, you’ll be ready to resupply your business without breaking a sweat or even leaving the site. Let’s get started!
What is a purchase order?
A purchase order (or PO) is a form that your business might send to a supplier as an official, documented way of requesting goods. It might take the place of a phone call or a visit to the supplier. Instead, you send a form with a list of everything you need, how many you’re looking for, and the price you’re expecting to pay.
When a supplier receives a PO, they may negotiate on the numbers of the goods or the pricing, but eventually, they accept your order and deliver it to you. So you can think of making a purchase order as a proposition to buy your inventory. When the supplier accepts your “bid”, it then becomes an agreement between your business and the supplier and the documentation needed to cement it.
Advantages of making a purchase order
Sure, maybe you don’t like extra paperwork, but purchase orders offer plenty of benefits to the businesses that use them, and combined, they make POs a very practical trading tool. These advantages include:
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Quick and easy to produce. With POs, you don’t need to travel to or even call your supplier to reorder your inventory. Simply fill out your form (when you do it every week, it’s like riding a bike!), and email it over to your supplier. Sorted, just like that.
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Improved reliability. In list form, with prices and numbers laid out clearly, it’s easy for both you and your supplier to see precisely what you’re asking for. And if either of you forget over the course of reordering, it’s always there for reference!
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Clears up disputes. When something goes wrong with an order, tempers can flare up. However, if everyone can see the original order, it will be clear how the mix-up occurred and any dispute is quickly cleared up.
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Better financial tracking. If you’re not sure how much you’ve been spending, your PO history offers simple documentation over your inventory expenses. No need to dig around anywhere else. It’s all here on your purchase order. Plus, your accountant loves them!
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Better inventory tracking. The same is true for your inventory. Down to your last pint of milk? Check your latest PO to see when the next batch is going to be delivered.
What to include in a purchase order
Depending on your industry and perhaps your supplier preferences, your purchase orders may look a little different from other businesses. However, they’re likely to include the same general information and formatting.
While purchase orders used to be printed and mailed to suppliers, it’s perfectly normal to use digital purchase orders in the 2020s. You may find pre-written templates in accounting software or through your POS system, as well as online (such as this free PO template from Xero).
Regardless of where you’re finding yours, here are some details to make sure you include:
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Purchase order number (PO number). This is the unique identifier for the order. It offers you and your supplier a way to refer to each specific PO.
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Date. Including the date the PO is created makes it easy to track orders and deliveries, as well as indicating when your payments are due.
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Buyer and supplier details. The legal names, addresses, and contact information of both your business (the buyer) and the supplier make your PO more formal and official, which is handy for your accountant.
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Item details. Naturally, you’ll want to include a clear and detailed list of everything you want on your order. This includes the specific names and brands of the products, where relevant, as well as the sizes and quantity you’d like delivered. For example, 2kg bags of Mr. Potatoheads Maris Piper potatoes x10.
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Total cost and currency. The overall amount you expect to pay, including any applicable taxes, shipping fees, or discounts. That way, if prices have changed, your supplier can contact you and renegotiate the order, allowing you to make an informed decision before delivery.
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Delivery instructions. Where and when you want the goods delivered, such as your store or warehouse.
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Payment terms. How and when the supplier will be paid (for instance, “Net 30,” means payment is due 30 days after the supplier sends an invoice).
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Approval signatures. Putting your signature on the PO proves to the supplier it’s you placing the order.
When should you place your purchase order
It’s always good to have a close relationship with your suppliers. If you’re on good terms with the supplier and their staff, you can get better deals, better service, and sometimes even the inside scoop on opportunities and supply disruptions that help you plan for the future.
One way to stay on your supplier's good side is to make their lives easier when placing your orders. That not only means submitting your PO to their specifications, it might also mean following their timescale where possible.
For instance, if you want your order delivered on Wednesday AM, and the supplier states they need 24-hours notice, you could submit your order on Tuesday AM and expect delivery on time. But if you speak with your supplier, they may prefer a little more notice, which means getting your PO in Monday PM could make life easier for them, and ultimately for you.
What’s most important is to look to your suppliers expectations when submitting your PO to ensure you give them reasonable time to fulfil the PO. Once your on good terms with them, they’ll more than likely accept any amendments you need to make over the phone if you need to make last minute changes.
The purchase ordering process from start to finish
Before we wrap up, let’s go over the process of making a purchase order from start to finish to show you how they really work.
Things a business needs before making a purchase order:
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A supplier. It may be an idea to contact a new supplier or read up on how they operate before submitting your PO.
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A template. As we explained earlier, these are readily available, and a template saves you creating a new order and filling out certain details every time you order.
So, how do purchase orders work from start to finish:
1. Identify what you need. Every purchase order starts with recognising that your inventory is running low or that you need new supplies. Make your list of everything you need that the supplier offers.
2. Create the purchase order. On an Epos Now system, for example, you can fill out your purchase order digitally, drawing from your existing products list and filtering by supplier. Once complete, review it carefully as small errors here can cause big delays later.
3. Send the purchase order to the supplier. Download your digital PO and send it in an email, print it off and deliver it to them. However you send it, make sure they see it!
4. The supplier accepts and fills out the order. Once accepted, the agreement is binding, although both parties may negotiate amendments.
5. Receive confirmation and delivery. Once prepared, the supplier arranges delivery to the site you requested. When they arrive, you check the goods match those on the PO and sign to receive it. With Epos Now, this is when you confirm and adjust the original PO, mark it as received, and automatically update your stock levels!
6. Match the PO, delivery note, and invoice. Once delivery is confirmed, your supplier will send an invoice. You’ll have a set amount of time, often 30 days to pay for your goods. You’ll also want to match the purchase order to the delivery note and invoice for your accountant.
First-class delivery: POs get the stamp of approval from us
When it comes to helping with your inventory, purchase orders are an integral part of the system. They’re quick, straightforward, and they help sort out any issues with your supplier (which helps keep those relationships strong!).
Epos Now are such big fans of purchase orders, we’ve built one into our POS system, which has all the tools you need to manage inventory and run a multichannel business like a pro!
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Sort your products by supplier so you can populate your POs in seconds
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Sync and store your purchase orders with accounting software for a transparent business history
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Manage one inventory no matter whether you sell online, in-store, or delivering
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Expand your inventory and go multi-site as your business grows without all the usual teething problems on an adaptable, all-in-one POS system
So there you have it! Now you know the long and short of purchase ordering, you’re ready to keep your shelves stocked and business running smoothly. Just remember to provide all the details your supplier will need and maintain communication with them so you can iron out any kinks as they appear. Happy ordering!
Enjoy this blog? Take a look at some of our other inventory reads:
How to manage inventory in a retail store
