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Proper financial management is crucial for the success of any business. A streamlined workflow when managing purchase orders can alleviate some of the challenges companies face by increasing visibility, reducing bottlenecks for accounting departments, and eliminating unnecessary spend.
But getting it right can be difficult, particularly for organizations that manually manage their purchase order process. From tracking to approvals to three-way matching, and more, a manual process slows down operations and increases the chance of error.
What is a purchase order?
A purchase order (PO) is a document sent from a buyer to a vendor for a request to purchase goods or services. It often includes the item, quantity, date, description of the order, confirmed price, payment terms, and, in most cases, a PO number.
The purchasing process can benefit from the use of POs since they ensure clear, explicit communications between buyer and seller. By accepting a purchase order, the seller enters into a binding contract with the buyer. This protects the seller from potential refusal of payment and establishes a smoother transaction process.
What’s more, purchase orders reduce the risk of incomplete or incorrect order fulfillment, especially in instances where the buyer purchases multiple products or services. The complex nature of B2B transactions can lead to details getting lost in the shuffle, but POs help organizations accurately manage requisitions, changes, and deliveries.
What is the difference between a purchase order and an invoice?
While purchase orders and invoices contain some of the same information, they serve very different purposes. Knowing both sides of the ordering and fulfillment process can ensure you set up efficient workflows for your accounting departments.
An invoice is sent from the vendor to the purchaser, while a PO is sent from the purchaser to the vendor. The purchase order is the official way to reserve the goods and services in question.
The invoice does include the same information as the PO—along with additional details, like the invoice number, vendor contact information, payment schedule, and amount due to the vendor. But the creation of the invoice isn’t prompted until the purchase order is submitted and accepted.
What does a PO contain?
While the specific contents of a purchase order may differ from one organization to the next, they generally contain the following information:
- Name and contact information of company purchasing goods or services
- Date of order
- Purchase order number
- Delivery date
- Description and quantity of what was purchased
- Agreed upon price
- Payment terms
- Invoice address
Below, you’ll find a sample purchase order, which includes each of the items we’ve just highlighted above.
With a tool like Impira, that is powered by artificial intelligence (AI) and OCR, your business can create an automation solution that allows for quick and accurate data retrieval from any multi-layout invoices and purchase orders at scale.
Why use purchase orders?
There are several reasons a business might choose to utilize purchase orders, but the most common objectives for adopting a PO process is that it:
- Sets clear expectations - It’s important that vendors and buyers are aligned in their expectations of any purchase, and POs help them achieve that alignment by establishing a common understanding of transactions. Buyers can more clearly state their needs, and sellers can use POs as a to-do list to ensure everything is properly fulfilled.
- Aids in budgeting - When a purchase order is created, buyers can instantly determine how that impacts their budget. POs act as a detailed record of spending, so purchasers can better plan and manage budgets.
- Helps manage inventory - Procurement, operations, or finance staff are usually tasked with managing inventory, which can be difficult without clear records of incoming or pending deliveries. POs help them to more effectively and accurately track and manage their inventory, as they include essential order details.
- Is legally binding - A purchase order acts as a legally binding contract, which helps sellers ensure they’ll be paid for their products or services and buyers ensure they’ll receive what they’ve paid for.
POs are a crucial part of protecting any company in their small, day-to-day operations and in much larger ways, like overall budgeting and—in more serious instances—during litigation. They provide the official documentation needed for effectively tracking and managing orders, so each involved party is prepared, protected, and satisfied.
What is purchase order management?
Purchase orders are important, so implementing them properly is just as vital. PO management is an internal process for fulfilling and optimizing purchases. Many businesses who use purchase orders have a specific, standardized process for managing them. This helps to ensure that all purchases are approved, justified, and necessary before POs are actually completed. Effective management helps the end-to-end PO process run smoothly and efficiently.
How does a purchase order work?
The purchase order process is designed to follow specific procedures with checks and balances built in to protect your budget, prevent unnecessary spending, and more.
Let’s take a look at the general steps in the PO Process:
1. Receive purchase orders
First, a buyer creates a PO for goods or services they’d like to purchase and sends the document to the supplier. The supplier’s accounts receivable (AR) department receives the PO, which includes the quantity of goods or services the buyer would like to purchase. AR teams often receive numerous POs at once, so it’s crucial that they properly track and organize each one and pay close attention to each document’s details.
2. Processing POs
Next, the suppliers will determine if they will accept/confirm the POs they’ve received. They may also deny or flag a PO for future discussion with the buyer. POs determine which items in their inventory will get packaged and shipped out, what the buyer will pay, and other terms and conditions. Everything must be properly recorded so suppliers can monitor stock levels and inventory. This accuracy is vital for ensuring the process runs smoothly and the supplier can reliably fulfill orders.
3. Downstream accuracy
The final step in the process is to complete the order. The supplier produces an invoice for each PO, fulfills and sends out the order with the corresponding PO and PO numbers, and closes the order upon completion. It’s important that everything is accurate and that all purchased goods and services are delivered to the buyer, since any errors can cause issues in customer service, budgeting, and supply management. Proper record keeping for this step is also essential in case an organization is audited.
The pros of utilizing POs
There are a variety of ways in which a business can benefit from utilizing POs. They help teams shift from a reactive process to a proactive strategy. In addition to ensuring more effective inventory management and transparent expectations between parties, utilizing POs:
- Helps track orders, establish clear communication with vendors, and schedule more efficient deliveries - Both parties have the same information on what was ordered, payment terms, delivery dates and more, so there is a smaller chance for confusion or miscommunication. POs also enable buyers to more seamlessly schedule deliveries at a time that works for them, which improves (and even accelerates) deliveries.
- Helps prevent duplicate orders and duplicate payments - As a company grows, so do the number of purchases they make, the number of people in the organization making purchases, and the number of vendors from whom they purchase. This can get quite complex and error-prone, but since POs offer an official record of each order, they also help teams avoid duplicate orders and payments.
- Offers vital insights on company budgeting, price increases and auditing needs - POs are detailed records of any purchases made and any incoming deliveries. This helps businesses better track, manage, and plan for budgeting, identify any cost increases, and protect themselves in case of financial audit.
Take your PO management process to the next level
The purchase order process is challenging to manage if you don’t have the proper tools for support. Manual methods hinder efficiency, visibility, and accuracy, which can limit your business’s ability to grow and remain competitive. In one study, 66% of employees said that automation is key in reducing errors, and it’s no wonder why. By automating data entry processes, your team can avoid the costly risks associated with manual methods.
A solid PO process that reduces errors, increases efficiency, and decreases costs requires powerful software to streamline your workflows.
Impira’s self-serve ML can be trained to extract a wide variety of purchase orders or similar documents with 98%+ accuracy. It can support multi-page documents with thousands of rows; which saves time and allows your team to focus on projects that matter to your business and your bottom line instead of manual data entry. And, with the powerful table extraction feature, Impira lets you pull data from tables and recurring lists and repeated values, and place them in a spreadsheet-like format—which can then be sent to the other systems you use every day.
Thanks to our no-code implementation, there’s no need to worry about long downtimes, as you can be up and running in no time. Sign up for a free account and try the full version of Impira today!