A purchase order is a document that is used in business transactions between a buyer and a seller. The document is prepared by the buyer, and it sets forth the items purchased, the price, terms and conditions of the transaction, discounts, payment terms, and time lines involved. The purchase order will also identify both parties to the transaction, shipping addresses, and an easily identifiable or trackable number.
When companies are newer or small, their needs are not as complicated, and they may need to get their orders within a short time frame. They also often deal with companies with whom they have a personal relationship. Therefore, purchase orders have been viewed by many small businesses as an unnecessary complication. However, many smaller companies are turning to purchase order systems, for many reasons as set forth below.
- Organization and Clarity — Purchase orders are simply used in many cases to help eliminate the potential for misunderstandings. The seller knows exactly what the buyer needs, when they need it, and at what price. The purchase order can be used as a "pick ticket" as the order is fulfilled, in order to ensure that the customer is getting exactly what they ordered. This is very helpful if the order is large or complicated. The purchase order can then be used by the purchaser to ensure that all items ordered were received, and it can be used by both companies to aid in inventory management and documentation.
- Technological Advances — Purchase order procedures are not nearly as complicated as they once were, thanks to technology. There are standalone computerized purchase order tracking systems, and some accounting programs have a purchase order module built into the program. There are systems out there that will prepare the order, send it, track it, and then even remind you when you need to reorder commonly used items.
- Legal Protection — Another reason that purchase orders are gaining in popularity for businesses of all different sizes is that it provides legal protection to both parties. When the seller accepts a purchase order, it becomes a legally binding contract. Therefore, the seller can take legal action against the buyer if the account is not paid under the terms and conditions as specified. Conversely, the buyer can take legal action if the order is not received as specified.
- Purchase Order Financing — Another thing that small companies are starting to take advantage of is the area of purchase order financing. For the small company that receives a large order but doesn't have the cash flow to purchase the necessary materials, purchase order financing is quite helpful. All that is necessary to secure the loan is a purchase order that can be verified by the financial institution. The companies that are willing to provide financing based on a purchase order understands that they are legally binding contracts, so there is not as much risk.