The Importance Of Purchase Orders

 

If you are a business owner in the UK, you know that purchasing goods and services is necessary for your operations. But did you know that there are specific procedures that you should follow when making these purchases? One crucial step is to issue purchase orders (POs). This article will explain the importance of Purchase Orders and why they are essential for your business.

The top 8 Reasons Purchase Orders are Critical for your Business

A Purchase Order is a document created by a buyer that contains a description of the goods being purchased, the total quantity of items, the price agreed to, and the delivery date of the goods, as agreed to by both parties. The PO should also clearly state the supplier information and a unique PO number. The Purchase Order number is a crucial reference throughout the entire procurement process.

Below, we will expand on why Purchase Orders are essential for your business processes. Here is a quick snapshot of our list:

  1. They Formalize the Purchasing Agreement
  2. Ease of Supplier Communication
  3. They Streamline the Payment Process
  4. Dispute Management
  5. Duplicate Order Reduction
  6. Easy Access to Data
  7. Enable Procurement Planning
  8. Robust Expense Management

 

  1. They Formalize the Purchasing Agreement

A Purchase Order will serve as legally binding evidence of what you intend to buy from your supplier. They will state what items you intend to purchase, the quantity, and the price both parties agree to. In the UK, as an example a PO is considered a legal contract.

POs will also serve as formal approval within your business to execute that procurement activity. Pro tip: As part of your process, add a supplier confirmation step to the PO process, requiring your vendor to provide written acknowledgment of your purchase order. This will ensure that both parties agree to the contents of the PO.

  1. Ease of Supplier Communication

Suppliers will use your Purchase Order as a reference to ensure they get your order right. They will also enter the Purchase Order number into their system, providing an easy way to search their system for your order. Using a Purchase Order number in an email will also allow easy grouping of communications. With the average person in the UK receiving about 140 emails per day, keeping communications around your POs is key.

This ease of communication will benefit your business and your suppliers. Streamlining your process with your vendors will help maintain excellent relationships with your supplier partners.

  1. They Streamline the Payment Process

A Purchase Order will provide a document to reconcile against during the payment process. Your business’s Accounts Payables department and the seller’s Accounts Receivable department will use the purchase order and associated PO number to match orders and payments.

Tracking payments within your system becomes more straightforward with a PO number to reference. Any communication with your supplier around variance becomes more precise with a Purchase Order as a reference. Overall, the purchase orders are important as they act as a form of accounting controls within your business. According to the ACCA, an professional accountancy body in the UK, internal controls are one of the most important ways you can safeguard your assets.

  1. Dispute Management

It’s easy to think we will never encounter a dispute with our trusted vendors; however, this can happen occasionally. With a purchase order being evidence of what was ordered, for how much, and how many, this is your best tool for managing any discrepancies during your dealings with your suppliers.

Sometimes disputes result from a supplier error; sometimes, it’s because of your buyers. Using a PO as a source of truth about what was ordered and when it was ordered will simplify any dispute resolution you encounter.

  1. Duplicate Order Reduction

Managing your orders with Purchase Orders helps to reduce duplicate ordering by keeping a record of what was ordered and when. This will act as a reference for your buyers and the suppliers.

With fewer errors and less duplication, your inventory management will see an immediate improvement.

  1. Easy access to Data

Managing your procurement with Purchase Orders allows easy access to purchase order insights. Over time, your purchasing data will be tied back to individual PO numbers. They will enable you to measure critical data, like order size, frequency, and other significant trends within your business.

Organizing your data into meaningful insights will allow you to manage your suppliers effectively. You will be able to isolate suppliers who aren’t performing for your business by reviewing order accuracy and order fulfillment metrics.

 

  1. Enable Procurement Planning

Enabling Purchase Orders in your business is vital to the procurement planning process. As you start to track your purchases using PO numbers, you will build up a history of data that will inform future purchasing decisions.

Robust procurement planning allows your team to make better buying decisions. Over time, you will be able to identify seasonal trends and plan your procurement resources accordingly.

  1. Robust Expense Management

Implementing a control like mandatory Purchase Orders is an essential first step toward expense management. By mandating PO generation as part of the purchasing process, you open the opportunity to put an approval process in place. You may be able to limit the access to purchasing to select individuals, in turn, keeping a handle on who buys what. A robust user access management platform will make this process easy for you to manage.

Building other controls to the PO process is another way to manage expenses. Putting upper limits on spending amounts during a specific period allows your teams to stay within a particular set of parameters.

Final Thoughts

Implementing Purchase Orders in your business is a crucial control to establish in your business. While putting this process in place may be a big step for your business, it’s a necessary change to make. Your procurement processes will benefit from this improvement from record-keeping to expense management.

Procurement plays a vital role in ensuring that we meet our client’s needs. Successful buying means that you get to deliver what you promised to your customer.

The easiest way to implement a PO management process is through procurement software solutions. If you would like to learn more about the extensive benefits digital procurement offers in the UK, schedule a free demo of Tradogram’s procurement management system today.

 

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