A purchase order is a process the organization follows to streamline the purchase of goods and services. These are documents sent from a buyer to a supplier with a request order, and each purchase outlines the specifics of a purchase request. Some of the order descriptions in a purchase order include the quality of items and the agreed price and payment terms for the ordered items.
The purchase order in a business transaction, adds extra steps to enable a smooth transaction between the buyer and the seller. In most cases, using a purchase order will help curb the risk of fulfilling an incomplete or incorrect order. Therefore, purchase order documents allow the buyer to clearly and explicitly explain their requests to the seller. Notably, the purchase order serves as a binding contract between the buyer and seller; if the buyer refuses payment upon delivery of a good or service, these documents will be used in legal actions against the buyer. Commercial lenders can also use these documents as a reference to provide financial assistance to the organization to boost its financial operation.
Purchase Order Follows the Following Protocols
A purchase order is a process that follows some protocols to initiate a transaction. It must follow the step-by-step procedure referring to the purchase order process or protocol. Purchase order protocol is not limited, but it is open to including additional information about the service or good one needs to purchase, for instance. Purchase orders might also include information such as quality checks, contractual approval, and also budget approval.
When a company or organization needs to purchase an item, the first step is creating a purchase order. The purchase order must include all the details of the product or service being requested from the seller, alongside the payment terms and pricing. Sometimes the purchase order needs approval before being sent to the seller, but in the modern era today, companies tend to eliminate this process by simply creating purchase requisitions first. The next step allows a purchase order to be sent to the vendor to initiate a binding contract between the buyer and the seller. The receipts of goods or services are then issued, and the seller then ships the order, attaching the Purchase order number to the packing list; this will help the buyer determine the order that has arrived. Besides, the seller also invoices for the order by ensuring that the purchase order number is included. Interestingly, a purchase order allows the company to counter-check the goods received using 3-way matching if it matches up the purchase order, invoice, and packing slip. The last process entails the authorizing and arrangement for payment, where the company buying approves the invoice and conducts the payment as per the agreed payment terms.
Benefits of Conducting Transactions using Purchase Orders
Purchase orders have several benefits in the transaction process; the most important is avoiding duplicating the orders, which helps in upholding integrity in financial operations. It also helps the company keep close track of what has been ordered from which seller. Additionally, purchase order also helps one to keep track of incoming orders and simplify the inventory and shipping process. The most important benefit of the purchase order is that it serves as a legal document. For instance, should a buyer fail to make payments for the services or products received, the seller will use these documents to seek legal justice against the buyer. Additionally, good purchase order records help in the visibility of the budget and help procurement managers trace and track all the expenditure records in the organization.