How Purchase Ordering Works and Why Your Business Should Care: A Step-By-Step Process

Purchase ordering is a crucial and efficient process that any company tasked with handling inventory should use. It helps you track incoming orders and streamline approvals on all purchases. If you’re new to the concept, you may wonder why using a purchase order is important. Between mitigating risks with suppliers, creating financial records and easing communication between team members, a purchase order procedure is essential to any business.

If you’re looking for the newest technology solutions for purchase orders, see how Finale Inventory can automate your purchase orders. Creating purchase orders within Finale Inventory is intuitive and efficient.

What Is a Purchase Order?

A purchase order is a document generated by a company that wants to purchase goods or services from a supplier — in other words, the buyer. It serves as the official request and lists the terms, number of items and acceptable price points. The company sends it out, then the vendor either accepts, rejects or requests a change. Once the supplier agrees to a purchase order, it becomes legally binding. The company who sent it must pay an invoice for the agreed amount, and the vendor must fulfill the request.

A purchase order will list all the necessary information outlining the request. A purchase order will include:

• Purchasing organization name
• Purchase Order Number (PO number)
• Date
• Description and quantity of items
• Price
• Shipping address
• Mailing address
• Payment information

Purchase orders can include other information, such as an estimated time of arrival and whether drop shipping is needed.

Many companies need a purchase order before they can fulfill requests to ensure payment. Most of the time, invoices are due within a specified amount of time from when the goods are received. Since purchasers receive goods before they pay, an official record mitigates the risk of not receiving payment for a delivery.

On the side of the buyer, a purchase order represents an approved and authorized request. Many companies have a “no PO, no pay” policy. In these cases, a company has no obligation to pay an invoice unless an official purchase order was sent to and accepted by a vendor. This policy prevents organizations from getting unsolicited invoices.

When Is a Purchase Order Needed?

A purchase order may not always be necessary, depending on your company policy. A business can dictate whether a purchase order is needed and exclude specific purchases from a formal process. For example, your company may not need purchase orders for requests under a set spending limit. You may have a pre-approved vendor, like an office supply service, which does not require official purchase requests. You may also have contracted suppliers, where a legally bound relationship already exists. So, in the absence of legal needs or company policy, why use purchase orders? Even if not required, there are many benefits of purchase orders. Depending on how you manage suppliers, you may send requests in a variety of ways. You may place orders over the phone some of the time and via email at other times. You may reach out to a potential vendor before deciding not to move forward.

The importance of purchase orders in business settings is their ability to simplify record-keeping and make arrangements between suppliers and buyers. A purchase order collects all the details of a purchasing arrangement and creates a legally binding deal. It allows you and your vendor to keep requests organized and makes them easy to track. There are many reasons why businesses need purchase orders. You should use them when you want to:

• Set expectations: As a purchaser, you can lay out your exact needs with your vendors. You’ll list the quantities you need and the price and shipping costs you expect to pay. You can express terms of the agreement as needed on the document. Both purchasers and companies can use it as evidence of the original deal if the shipment doesn’t meet expectations.
• Manage and track orders: Your procurement, finance and operations teams all need a reliable way to track orders and pending shipments. Official and standardized documentation speeds up communication, management and tracking. Without a standard procedure, you can end up digging through emails to find the terms and quantities of an order when someone needs them.
• Streamline budgeting: In general, you won’t pay your suppliers until you have confirmed receipt of the requested goods. Depending on the terms of your invoice, you may have up to a month or more to pay the invoice back to your vendor. It can get confusing to budget around the payments you expect to make later. With purchasing orders, you have documentation of the amounts owed, so you have accurate spending data. If you have software to manage purchase orders and other financials, these numbers can even update automatically.
• Create legally binding terms: Unless you have an official contract with a vendor, a purchase order acts as the legally binding document. Once a vendor accepts a purchase order from you, you are both bound by its terms.
• Track financial details: Purchasing orders create many advantages from a financial perspective. Many companies require approval before any purchase orders are sent, ensuring they have the budget for the purchase. The internal accounting team can use purchase orders to ensure the inventory order matches the amounts paid. Having POs and matching invoices creates a robust financial record and enables smooth auditing.

How Do Purchase Orders Work?

The purchase order procedure can vary depending on your company policy. No matter how your company sets them up and what information they include, creating them is easy with Finale Inventory. There are four steps in the purchase order process:

1. Create purchase requisition: First, a procurement specialist must get approval from the finance department. So, the buyer creates a document called a purchase requisition. Finance will either approve, deny or flag a request for further discussion. A requisition is not a purchase order. While a purchase requisition may have similar information, the document is used internally to get a purchase order approved before it is sent to the vendor.

2. Create purchase order: After the finance team approves a requisition, the buyer can create a purchase order to send to the supplier. It should include the billing address, shipping address, PO number associated with that order, the shipping date, product request, quantity, price and any other critical information to complete the order. The best way to create the order is by using software like Finale Inventory. When purchase orders are electronic, it makes the documents easier to track and automatically updates your inventory. When using Finale Inventory, the PO is sent to the email after you have completed a purchase order.

3. Vendor approves the request: The vendor can either accept, reject or submit the documents for further discussion. The supplier must ensure the price, quantity, total, terms and conditions are acceptable. When they approve, the order becomes legally binding, which is why it’s vital to start with a requisition before sending a purchase order. The vendor then begins preparing the order.

4. Receiving the order: When the shipment arrives, you can mark it “received” and update your inventory to match. Having a record can be helpful for accounting, auditing and general stock keeping. Finally, if the delivery meets your expectations, pay the supplier to complete the purchase order process.

Use Automated Purchase Ordering and Reporting to Prevent Overstocks and Backorders

Your assets are tied up in inventory, so having too much can be an issue, and having too little can affect your business. Backorders frustrate customers and deter them from shopping with you again. Overstocks result in aged inventory, which can hinder a brand’s reputation and growth. It often has to be sold at a clearance rate and takes up square footage that your company could otherwise dedicate to a product you can move.

Because of this, you must carefully plan purchasing orders so that inventory always arrives when you need it, in the amount that you need.

By creating purchasing orders through inventory management software, like Finale Inventory, you can set and calculate min/max thresholds to keep inventory on track. For each product in stock, you can set a reorder point, and when product dips below that number, your software will update you. You can also set the maximum number of products you want in stock after reordering. Finally, you can set the standard quantities your suppliers offer, such as cases of 50 units.

You can then automatically generate purchasing orders based on these numbers and send them to your preferred suppliers. Inventory tools can also predict your product needs.

Handle Inventory With Inventory Management Software

When you use inventory management software, purchase orders become a record of the stock you can expect. In Finale Inventory, once you set a purchase order to “committed” status, your software will update your stock availability. Then, when the shipment arrives, you can receive it against the purchase order. Your in-stock number will automatically update to match.

With supplier information on record, the software can populate orders with the right information. Reporting tools will tell you what products need to be ordered and how many. They will contain a low-stock threshold for each type of merchandise, update within the software and email you when you need to reorder.

Plus, inventory management software allows you to calculate your sales velocity to understand how your stock moves and find emerging patterns. This data can help you adjust your settings for purchase orders.

Minimize Inventory Cost With an Efficient System

A purchase ordering system gives you a standardized record-keeping system. These documents tell you precisely what you ordered. Because they are legally binding, you can hold suppliers accountable when what arrives doesn’t match the request. Suppliers change their prices and shipping methods often and may send you the wrong amounts. When orders arrive, you can add inventory and import the supplier’s invoice into your software.

Automating your purchase ordering can save you on inventory costs by saving time. An efficient system for generating purchase orders will save you time and money by:

• Centralizing purchase orders alongside vendor invoices and other documentation.
• Automating vendor catalogs to find goods and pricing quickly and pre-populate purchase orders.
• Expediting the internal requisition approvals process by generating total costs automatically.
• Streamlining communication about incoming shipments by making purchase orders easy to share.
• Visualizing your order status across your entire department or warehouse at a glance.
• Tracking purchase orders against goods received for up-to-date stock information and error reduction.

Use Purchase Orders for Financial Clarity

A complete record of stock intake, purchases and sales is crucial for accounting and auditing. Thus, recording purchase orders and the corresponding invoices is helpful. They create duplicate records to verify inventory levels and payments and allow the financial team to resolve discrepancies. Having your purchase orders automated reduces the chances for human error on your company’s end, creating fewer inconsistencies.

You’ll save time through automation, and keep accurate records for accounting purposes.

Finale Inventory’s Solutions

When you consider that every big business uses them, it’s easy to see why purchase orders help small businesses. Automating your purchase orders and the entire reordering process can have a time-saving impact on your business. Finale Inventory offers purchase orders within its inventory management solution.

It collects your purchase orders and supplier information in a single, searchable location. You can manage multiple suppliers with ease and pull pricing, product details and contact information for each of your vendors. You can manage shipments to numerous locations and check your shipments against purchase orders, and even mark partial shipments when needed.