The ABCs of Purchase Order: Understanding Why Your Business Needs One! 

The ABCs of Purchase Order_ Understanding Why Your Business Needs One

Have you ever made bulk orders and ended up with missing items, payment muddles, as well as delivery delays? It’s not only you- most of us land into the same problems if there’s no purchase order in place. 

Today’s rapidly evolving business landscape demands transparency and efficiency. It doesn’t matter if you are a startup founder, procurement executive, or heading a financial department- missing out on minor details can be expensive for you. PO processing plays a crucial role here in structuring your procurement operations. 

But the question is what is meant by a purchase order? And how does it safeguard your business from financial disasters? 

This blog will take you through purchase order meaning, format, advantages, and more. Let’s scroll below to master this simple term, which fosters streamlining business operations, manages cash flow, and strengthens relations. Let’s dive in right away!

What is Meant by a Purchase Order: Understand Just in 5 Mins! 

Purchase Order (PO) is simply an official document shared by the shopper with the supplier or vendor. It outlines a clear list of goods or services the buyer intends to acquire, including details such as quantity, pricing, and delivery terms.

PO processing acts like an approved shopping list, but in a structured and legally recognized format. It seals what exactly is bought and prevents possibilities of confusion and arguments to missed items or price gauging. 

Whether you are planning procurement in your office or a bulk inventory, the purchase order system ensures the organized flow of cash, monitors supply, and is legally supported. It isn’t just a template- it forms the crux of your procurement process. 

Now that we have understood the purchase order meaning, it’s time to scroll down to a real-world case study! 

Indian’s Procurement Powerhouse: GeM Crosses ₹5 Lakh Crore Before the Year End! 

Introduced in 2016 by the Indian government, Government e-Marketplace (GeM) is a digital platform to streamline the procurement of supplies across a wide array of organizations and government units. It’s the go-to solution for public sector buyers to ensure a high return on investment. Let’s scroll below to see the 2024-25 stats! 

Truly, GeM is a purchase order management system that has taken government buyers to the next level. Time to take a closer look at the types of POs you can use.

Standard, Planned, Blanket, or Contract: Which PO Type Fits You?

Choosing a PO template completely depends on the procurement needs of a company. Each type has a different significance. Let’s see it below! 

  1. Standard PO 
  • It’s popularly used by a wide array of companies wanting to purchase items individually. 
  • It has a précised purchase order format, is generally leveraged for a standalone deal, and includes pre-defined shipping dates and policies. 
  1. Planned PO
  • Planned POs let businesses manage orders over time, rather than committing to a one-time delivery. 
  • Companies who plan their purchases before and wish to break the delivery into small segments can leverage Planned Purchase Orders. 
  1. Blanket PO
  • Blanket Purchase Orders simplify recurring purchases by omitting the finer details found in Standard POs. 
  • It’s a contract to purchase items from the seller on a recurring basis, but the details remain unspecified. 
  1. Contract PO
  • Contract Purchase Order format is typically an agreement to strengthen business partnerships between two entities. 
  • It just carries vendor information, payment, and delivery terms; later, Standard PO is created to buy the items. 
  • Contract PO is generally used for long-term commercial alliances where the need to purchase items will go on. 

So, before you plan to create a PO understand your requirements and then choose the type. Now, let’s move ahead to understand the advantages! 

The Key Advantages of Purchase Orders You Shouldn’t Ignore

  1. Leverage PO to minimize the misunderstanding between the buyer and the supplier. 
  2. It’s a legal contract that protects both parties from indulging in disputes. 
  3. It controls spending but verifies the purchases before they are made. 
  4. The PO number serves as a reference point, making order tracking more efficient. 
  5. For recurring orders, this system reduces errors involved with manual intervention. 
  6. It helps to plan orders in a better way and strengthens supplier relations. 

We have seen the details to the advantages of purchase order, now lets move ahead to understand its format. 

Purchase Order Format: Here’s How to Structure It! 

To get started with PO processing, follow the below instructions!

  1. PO Number: This unique number links to a particular purchase, making it easy to monitor status and history. 
  2. Date: Indicates when the purchase order was issued to the vendor.
  3. Buyer Details: Include the purchasing company’s name, official address, and phone or email contact.
  4. Supplier Details: Provide the name, location, and contact number of the supplier fulfilling the order.
  5. Shipping Address: Enter the postal details where the delivery is to be made. 
  6. Item Details: Provide a detailed description of each item or service being ordered.  
  7. Quantity: Add the number of units being purchased
  8. Unit Price: Fill in the cost of every item per unit in front of it. 
  9. Total Amount: Add the total cost of every item purchased 
  10. Payment Conditions: Add deadline, methods, etc. 
  11. Delivery Date: Insert the shipping timeline here. 
  12. Terms and Conditions: Add all legal regulations to be followed
  13. Authorized Signature: In the end, get it signed by the authorized manager or official. 

How Does a PO Work: A Detailed Layout! 

  1. Purchase Request (PR)
  • Identify your needs and generate a purchase requisition that contains the item list, quantity, facts, dates, and special needs. 
  • It mainly comes from the individual or a department head. 
  1. Create a PO 
  • The PR is now converted to a PO, where companies follow their own Purchase Order Format.
  • It includes basic details like PO number, date, shipping address, etc. 
  1. Review and Approval 
  • Now, it’s time to cross-check and accept the PO, which might cater to multiple stages of revisions and approvals. 
  • This step is crucial to ensure the details are accurate and abide by the procurement policy of the company. 
  1. Share the PO with the Supplier
  • Once approved, the buyer needs to share it with the vendor via e-mail or traditional method. 
  • Once the order is received, supplies check if the items are in stock, and he can meet the requirements, which further decides if the PO is rejected or accepted. 
  1. Complete the Order
  • Now, it’s time to process the order and confirm all the order details. 
  • Pack the order as agreed on the PO and proceed it ahead. 
  1. Ship the Order
  • The vendor ships all the items abiding by the terms mentioned in the Purchase Order.
  • It includes shipment handling instructions and other conditions. 
  1. Share the Receipt 
  • Once the buyer receives the items, he cross-checks the order based on the PO document. 
  • In case of discrepancies, he contacts the seller to settle them. 
  1. Generate Invoices and Initiate Payment 
  • Now, the vendor shares the invoice with the buyers depending on the PO terms. 
  • Once the invoice is received, the buyer pays the purchase amount. 

5 Best Practices to Handle Purchase Orders! 

  1. Leverage PO tools that are available online and integrate automation. This ensures a speedy process and reduces errors. 
  2. Make use of standard purchase order templates that are outlined with all the details. 
  3. Assign officials to manage the process. 
  4. Ensure clear communication with vendors and address their concerns promptly. 
  5. Maintain accurate records of POs, invoices, receipts, etc. 

Conclusion! 

The compliance-driven system demands efficient management of procurement, and Purchase order plays a vital role here. It’s a shield that protects the vendor and the buyer against unwanted disputes, disagreements, as well as miscommunication. If you are still hesitating to integrate this system into your business operations, the above article is a must-read. Right from PO template to best practices, it covers all for you. Take a look and save it for later. 

If you want to streamline the PO process, start managing it with Munim today. Want to know how you can create POs with Munim. Click here. 

FAQs on Purchase Order! 

  1. What is the difference between a PO and an Invoice? 

Purchase order is shared by the buyers, listing out their requirements in order to track and manage the procurement process. The invoice is shared by the supplier to the buyer after the order is fulfilled as a request to make the payment.

  1. Who Creates a PO?

The buyer creates a PO listing the items to be bought, delivery dates, terms, etc. 

  1. What is a GRN? 

Goods Received Note, abbreviated as GRN, is a receipt sent by the buyer to the supplier as an acknowledgement for receiving the order. 

  1. What is the PR to PO process? 

This is a crucial stage in procurement that details the purchase request initiated with the department to a formal order placed with the supplier. 

priyanka.chaudhari

About the author

Priyanka Chaudhari is an enthusiastic writer with an ocean of experience in the tech world. She writes mainly on topics like accounting, e-invoicing, GST, and billing. Currently, she is working with Munim and comes up with innovative topics for the readers. Stay tuned to her blogs.

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