Moss - Purchase Orders Explained: How Do Businesses Use Them? image

Moss - Purchase Orders Explained: How Do Businesses Use Them?

In this article, Moss explains everything you need to know about purchase orders, including how to create one, and ways that you can automate purchase orders to save your business time and money.

Blog
Posted byMoss
onTuesday, 23 January 2024

A purchase order is a document that formalises a business’s request for goods or services from a supplier. It essentially acts as a legally binding contract between the two parties (when signed by the supplier). The purchase order outlines the type and quantity of the goods being requested by the buyer, as well as delivery requirements, payment terms and other important information.

In this article we’ll explain everything you need to know about purchase orders, including how to create one, and ways that you can automate purchase orders to save your business time and money.

What is a purchase order?

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In our last article we outlined the procurement process from start to finish. Procurement comprises many separate processes, and three core functions (people, process, and paper) that work together to facilitate smooth transactions between buyers and vendors.

Here, paper refers to the numerous documents that are used throughout the procurement life cycle as a recordkeeping tool. Together, these documents ensure clear communication, regulatory compliance, and accountability between stakeholders and involved parties.

A purchase order is one of these documents. It is a formal request for goods or services that is sent from the buyer to a supplier to initiate a sales transaction. It is often confused with purchase requisition, another document used in the procurement process.

Where a purchase order is an official, binding document that outlines a customer’s request for goods from a supplier, a purchase requisition is an internal document that is used within the buying company. Its purpose is to outline needs for goods or services to gain approval from the necessary people within the business.

Why are purchase orders important?

Purchase orders help businesses ensure that the goods and services that they need are delivered as ordered, on time. They do this by structuring all of the necessary information that the supplier needs to complete the order. Purchase orders are also essential for reporting and accountability, providing a clear record of the customer’s request that can be used as a reference going forward, i.e. in the three-way matching process.

How to create a purchase order

The purpose of a purchase order is to provide a supplier with the relevant information they need to fulfil a buyer’s request for goods. As a result, it should contain the following:

  • Customer and supplier company information (addresses, contact details, etc.)

  • Purchase order date and desired delivery date

  • Purchase order number

  • Shipping address and other delivery details

  • Order details (item description, quantity, unit and total price, etc.)

  • Signatures from authorised individuals

  • Attachments and other supporting information

Another field that is commonly included is ‘Free on Board’ (FOB). This is used to determine when liability for the goods passes from the supplier to the buyer. The FOB field may be filled as follows:

  • Origin ​​— The buyer assumes ownership and responsibility for the goods once as soon as the shipment process begins.

  • Destination — The seller retains ownership and responsibility for the goods until delivered to the buyer. 

As a result, FOB can have a significant impact on shipping and insurance costs. 
Payment details are provided by the supplier when they fill out an invoice. This is sent to the buyer when their request for goods or services have been delivered.

Purchase order example

To put these requirements in perspective, here is an example of a purchase order. It contains fields for all of the relevant information outlined above.

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Having a purchase order template on hand that you can reuse every time you want to order from a supplier can save time and increase finance and accounting efficiency.

Different types of purchase order

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There are four different types of purchase order. Each one serves a specific purpose in outlining a request from a buyer to a supplier.

Standard purchase order (PO)

The standard purchase order (as seen in the example above) is the most comprehensive of the four PO formats. It contains all of the information needed to fulfil one order of a specific type and quantity of goods, before a specific date. Standard purchase orders tend to be used for one-off purchases.

Use case: A business needs an item, knows how much of that item it wants, and knows when it wants it to be delivered.

Planned purchase order (PPO)

A planned purchase order is used to signal a buyer’s long term commitment to buy goods from a supplier. However, unlike standard purchase order, it includes estimated/tentative delivery dates. This is usually a period across which multiple deliveries may be requested against the order total.

Once the buyer has confirmed dates for a delivery (or deliveries) they will update the PPO with a document called a schedule release.

Use case: A business knows that it will need a certain item in the future, and wants to commit to a certain amount of that item, but it doesn’t know when it will need it.

Blanket purchase order (BPO)

A blanket purchase order is even less specific than a planned purchase order. As well as omitting specific delivery dates, it also omits item quantities. BPOs typically list the items that the customer expects to buy, sets maximum spend limits for each item, and establishes a timeframe across which the BPO will remain valid.

BPOs are also referred to as standing orders, and are used when a buyer lacks enough information to build out a specific purchasing schedule.

To confirm the details that are needed to complete a delivery/order, buyers will issue a blanket release against a specific BPO. This outlines quantities, dates, and sometimes item prices that were unconfirmed in the original document.

Use case: A business knows that it will need a certain item in the future, but it doesn’t know how much, or when it will need it.

Contract purchase order (CPO)

The final type of purchase order is the contract purchase order. It is the most bare bones of all, simply outlining the terms of an agreement between a customer and supplier. In this sense, a contract purchase order serves as a reference for future POs that will be released against it.

Use case: A business wants to commit to contract conditions that have been negotiated with a supplier, but does now know what items it needs, or when it will need them.

Below is a table for a quick comparison of the information typically included in each type of purchase order.

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What is the purchase order process?

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The purchase order process is a part of the wider procurement process. It centres around the life cycle of the purchase order, from the point of creation to closure.

The purchase order process can be divided into the following steps, following the approval of a purchase requisition:

1. PO creation

The buyer sends the supplier a purchase order with all of the information needed to fulfil the request for goods or services.

2. PO approval

Upon receiving the PO, the supplier will review the request and either accept, propose changes, or reject the terms. Once the PO has been signed by the supplier, it becomes a legally binding contract between the two parties.

3. Invoice creation

In return, the supplier will issue an invoice to request payment from the customer. Exactly when the supplier issues the invoice depends on the specific payment schedule that was agreed upon.

4. PO matching

Following delivery, the customer will check that the goods received match the details outlined in the purchase order, and the payment request included in the invoice. This process is known as matching, or three-way matching when comparing:

  • Delivery receipt

  • Purchase order

  • Invoice

5. Invoice approval/payment

If the customer is happy that the delivery meets the PO and invoice specifications, the invoice will be passed to accounts payable for authorisation and payment. Once the invoice has been paid in full, the purchase order will be closed, finishing the purchase order process.

Purchase order automation

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Modern spend management software allows businesses to automate many different tasks and processes associated with discretionary spendingexpenses, and pre-accounting. One of the major benefits is being able to get rid of physical paper work altogether with digital purchase orders. All necessary information is send across to the supplier in a digital format, and can be adjusted and adapted as needed without multiple rounds of sending documents for feedback.

Accounts payable management with Moss

Moss’ smart spend management software allows businesses to save time and money with automated accounts payable workflows. Our customers can create purchase requests in Moss, and automate approval chains to ensure each request goes to the right person for sign off.

Moss also allows you to automatically extract data from invoices using OCR scanning directly from your smartphone. Using the invoice management module, this data can be stored and passed on via direct integration to popular accounting software platforms, including Xero and DATEV.

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