How Do Purchase Orders Work?
Purchase orders are legal binding documents between a supplier and a buyer. The PO outlines the items the buyer agrees to purchase at a specific price point. A purchase order, or PO, also details the delivery date and terms of payment for the buyer.
In addition, purchase order systems have made the process more efficient and allow for better inventory and payment management.
The Purpose Of Purchase Orders
Buyers use POs when they want to purchase supplies or inventory on account.
This means the supplier delivers or ships the purchased items prior to payment, with the purchase order serving as its risk protection. While legal protection is important, purchase orders are vital to inventory management and payment tracking.
POs will help suppliers compare inventory ordered, shipped and on hand, ensuring your inventory metrics are accurate. Having the ability to track payments for specific purchase orders is important and POs allow suppliers to do just that. Buyers hold copies of orders they place to keep track of timely receipt of the items.
Preparing Purchase Orders
Purchasing departments often prepare POs for the buyer. Electronic software systems are commonly used in the process for creating them. POs often have;
- Purchase Order Number
- Shipping Date
- Shipping Address
- Billing Address
- Items Purchased
- Quantity Of Items Purchased
- Price Of Items Purchased
By submitting a purchase order the buyer creates an in-progress purchase. The order will remain “in-progress” until the buyer receives all ordered items. The supplier scans received inventory purchase orders into the system and either process or marks them as payment required The buyer finishes the purchase when they send the payment.
Suppliers Using POs
Suppliers use purchase orders for order fulfillment and payment processing. When the receipt is in, the PO is used to pull purchased inventory for packaging and shipping.
The supplier pulls the inventory and prepares an invoice for items prepared for shipment. Usually, with inventory management software, the supplier records the shipment when products have shipped out. The supplier files the purchase orders with the appropriate copies. Status determines whether orders wait on payment or the supplier fills them. Finally, payment due dates and reminders are set.