A good business always has smooth operations, which is a result of proper communication and careful documentation. However, while making purchases, companies face issues like miscommunication with suppliers, overspending, unapproved purchases, etc, which can disturb the workflow. To prevent these issues it is always recommended to have a document known as, a Purchase Order. But, how does it help solve these problems?

What is a Purchase Order?

A purchase order or PO is a formal document issued by a buyer to a supplier, authorizing the purchase of goods or services. In other words, it is a legal document sent by the buyer to the seller, detailing the product, quantity, quality, payment conditions and all other relevant information related to a purchase. 

Once the seller accepts the purchase order, it becomes a legally binding document between the buyer and seller. It protects the interest of both the buyer and seller thereby minimizing the risks involved in the transaction. 

Benefits of Having Purchase Order

The following are some of the key benefits of having a purchase order:

• Better clarity: Purchase orders give you a clear outline of what you’re buying, quantities, prices and delivery dates. So there will be no confusion between buyer and seller.
• Budgeting: By issuing purchase orders companies can track their spending and manage their budgets better. Each PO is a commitment to spend which can be measured against financial forecasts.
• Legal Protection: A purchase order is a legal document that protects both the buyer and seller. If a dispute arises the PO can be used as evidence of what was agreed earlier.
• Smooth Operations: Purchase orders help in organizing the procurement process, which helps in managing large volumes of orders. This means better inventory management and procurement planning.
• Compliance: All the transactions taken through PO are documented. Documentation is essential for internal audits and regulatory compliance.

Types of Purchase Order

Businesses use different types of purchase orders based on their need and requirements. Generally, there are four types of purchase orders:

1. Standard Purchase Order: This is the most widely used type of purchase order. It is used for one-time purchases of goods and services. These types of POs are generally more comprehensive as transactions with that specific seller are not frequent.
2. Blanket Purchase Order: A blanket purchase order is a long-term agreement between the buyer and seller that is used when there is a need to make multiple purchases over a period of time. The main benefit of BPOs is that it reduces the time of issuing individual purchase orders for each transaction.
3. Contract Purchase Order: This type is used when the buyer and seller enter into a long-term agreement, outlining terms and conditions but without specific details on the items or services to be purchased. This type of purchase order has the least amount of details. 
4. Planned Purchase Order: Planned purchase POs are like blanket POs but with scheduled delivery dates and quantities. It is used when the buyer knows what they need but will order over time.

Components of a Purchase Order

The format of a purchase order depends upon its type, need and requirement. Even though, every purchase order will have the following key components:

• Purchase order number: It is a Unique identifier number that helps track the purchase for the entire process.
• Buyer & Seller Info: Names, addresses, and contact info of both the buyer and the seller.
• Purchase order date: The date the PO is issued.
• Description of Goods/Services: Detailed description of the items or services being purchased (model numbers, sizes, etc).
• Quantity and Price: Number of units required and price per unit.
• Delivery Date and Location: Expected delivery date and location of delivery.
• Payment Terms: Payment terms (due dates, early payment discounts, late payment penalties).
• Terms and Conditions: Any additional terms (warranties, return policy, non-compliance penalties).