What is a Purchase Order? How Does it Work?

Over 40 value points are considered by B2B businesses before making the purchase decision and officially passing the purchase order to the supplier.

But what is a purchase order? And why is it important for your contractor business?

There’s much to explore to understand the nitty-gritty elements of using a purchase order in your procurement process.

But don’t worry. We have filtered the information to help you get a 360-degree perspective on the topic.

So without further ado, let’s get the learning started.

What Is a Purchase Order?

The purchase order is a document issued by a business’s purchasing department while placing an order with the supplier or vendor.

The document contains detailed information about the required product and other details that give the seller a clear idea of the requirements.

You can include the type of goods purchased, price, buyer’s address, time duration of the required products, and quantity. It’s a compact legal draft given by the buyer for purchasing goods from the seller.

Once your internal team finalizes the purchase order approval process, you can share the documents digitally or manually with the sellers to initiate the procurement process.

The overall purchase order workflow involves different steps. Let’s have a look at it.

How Does a Purchase Order Work?

We have filtered the basic steps in creating, approving, and finalizing the purchase order. These steps involve both the buyer and seller handling their desired task.

1. Buyer decides to purchase from a seller

Being a buyer, you need to create a purchase requisition form that includes the material requirements from your internal employees to complete the specific work.

Handling service tasks can require an instant requirement of useful equipment or material that must be covered.

The employees raise the requirements to their seniors or department head to prepare a purchase order. If the requirement is small, the employees can create quick purchase orders to process and procure the required material.

2. Draft purchase

Once the document is created, it is passed on to the designated authorities for approval. It can be easily approved if the requirement is genuine and the cost does not exceed the budget.

The approved purchase order is converted into an official legal document sent to the desired seller with different vital details. The purchase order gets a unique purchase order number that can help further process the reimbursement request.

We’ll discuss the critical elements that need to be included in a purchase order in the latter half.

3. Seller review and confirm it

Once the seller receives the document in digital or manual form, they review the purchase order and confirm the availability and estimated delivery time.

You can ask for any change you want in your purchase order, and the seller can quickly update the changes before the delivery is initiated.

But it’s a large-scale transaction; chances are you might have to send a new and updated purchase order to finalize the approval on the seller’s behalf.

4. Approve Purchase Order

The purchase order is finalized by the authorized manager of the seller. It contains details about the transaction and the requirements. Once the check is complete, the authorized authority can sign off on the order.

The purchase is accepted and becomes a legally binding contract between the seller and buyer.

5. Receive Invoice from Seller

The consignment is sent to the buyer’s address, and once the team approves the purchased goods, the seller sends an invoice to the account payable department, where the payment is finalized.

The AP department of your business thoroughly checks the transaction process and financial statements, PO number, key differences, and other documents to ensure there are no errors.

Once the check is complete, the payment can be smoothly processed to complete the procurement process.

Different types of purchase orders involve different regulations in the processing. Have a look.

Types of Purchase Orders

You can make different purchase orders based on your business operations and requirements. You can choose the purchase order types to procure material from your sellers or vendors. Have a look.

1. Standard purchase orders

The most popular purchase order is the standard purchase order, which includes information like delivery schedule, payment terms, delivery date, and quantity. The process gives the buyers a crystal clear idea about all the details of the purchases.

2. Planned purchase order

The planned purchase orders are created when the buyers are uncertain about a few details, like quantity or delivery date of the purchase but want to initiate the procurement process.

3. Contract purchase order

The contract purchase order is the formal process of creating a purchase order with the involvement of both seller and buyer. They need to sign legal documents regarding the purchase that offer legal protection for organizations.

4. Blanket purchase order

The buyer delivers bulk orders and negotiates discounts on the official pricing of the material. These are applied in advance, similar to the planned purchase orders.

Now, let’s focus on the necessary elements you need to include in your purchase orders.

What to include in a Purchase Order?

1. Your company’s name and address

One of the important elements of the purchase order is your company name and address. You must ensure that you have a template for creating your purchase order, including your business address and name.

It enables the sellers or vendors to ensure that the deliveries are made accurately and that there are no discrepancies in processing the requirements.

2. Seller’s name and address

You need to include the vendor information, including the vendor address and name, that can help you clarify the details of the sellers you want to associate with.

It can help the seller approve the purchase order from their end quickly by verifying the listed requirements.

3. Shipping address

A shipping address with a date is a critical factor in the purchase order. While creating a purchase order, ensure that you mention your billing address to avoid miscommunication and disagreements in the future.

The seller will dispatch the material to the shipping address, and if no one receives the consignment, the return will be made to the seller’s address.

4. Order details

You need to fill in the order details with a brief description of the requested material, estimated pricing, item description, and special information that the seller or the vendor needs to follow.

Enter the price estimation of the material, shipping costs (if any), subtotal, and taxes to complete the overall details of the purchase orders.

5. Total amount

The total amount that the buyer must pay needs to be precisely calculated. The same price should be listed on the invoice, enabling the buyers to cross-check and ensure there are no discrepancies in the process.

These details can help you create a professional and well-vetted purchase order to achieve the desired outcome.

Let’s look at the benefits of a purchase order for your contractor business.

Why Do Companies Use Purchase Orders?

You can track the inventory and purchase history with the help of a purchase order. It can also help you order required material in advance without paying at first.

You can ensure that the purchase order goes through a professional approval order with multiple checks to ensure that you don’t make an unrequired purchase.

A purchase order can ensure that your cash flow and procurement process are organized, and your purchasing history can be tallied whenever you want.

Similarly, sellers can check their inventory, recurring orders, and business segments because of a professional purchase order. They need to streamline their delivery operations to match the requirements mentioned in the purchase order.

The sellers don’t have to go through the hassle of procuring payments from clients as the buyers are legally bound to pay the total amount once the material is delivered at the delivery address.

These benefits can help the sellers and buyers streamline the selling and purchasing process and ensure that both parties can build a strong trust and long-term relationship.

Associating with the right sellers can help you get great discounts on bulk orders, enabling you to earn profits from selling products to clients in your service business.

But creating a professional purchasing order requires quality software that can help you escape the troubles of manual processing and boost your operational efficiency.

So, which software is best for your contractor business?

With the purchase order industry on the rise, it is currently estimated at around $9.5 billion. It becomes difficult for contractors and businesses to filter the best software for creating purchase orders and streamlining their purchase transactions.

We have filtered the leading software to help you escape the unnecessary paperwork and digitize your purchase order creation process.

InvoiceOwl Can Handle Your Purchase Order Process

InvoiceOwl is the leading estimation and invoicing software for contractors that can help you handle your purchase orders and invoices effectively. Within a few clicks, you can create electronic purchase orders that can be dispatched to your prospects.

InvoiceOwl offers estimates processing, payment processing, recording a credit memo journal entry, reporting, invoicing, and other powerful features to streamline your business finances.

The software’s simple and intuitive interface enables your employees to easily use the software and explore the different features for managing your finances and getting financial assistance. You can check the purchased order history within a few clicks, and different users can be allowed to access the document based on their authority.

You can remove the manual processing of your estimates and invoices and integrate automation into your financial workflow to add efficiency.

Access the FREE trial today and transform your purchasing process.