How organized is your purchasing system? If you’re not already using purchase orders, it may be time to start. If you are using them, take a moment to evaluate how well your off-the-shelf software fits your current needs. It may be time for a custom purchase order system.
Why should I use purchase orders?
A formal purchase order process has a lot of benefits for both buyers and sellers. Here are a few:
- clear and explicit communication to sellers
- help purchasing agent manage incoming and pending orders
- protect seller in case buyer refuses to pay (legally binding)
- standardize the purchasing procedure
- a PO is the first step of purchase-to-pay process in ERP (Enterprise resource planning) systems
- useful for budgeting and forecasting
- important components of audit trails
What information should a PO include?
A purchase order is your place to spell out all the details of your planned purchase.
- buyer name
- mailing address
- shipping address
- seller name
- mailing address
- shipping address
- date
- order status
- open
- pending
- shipped
- closed
- payment information
- po#
- detailed list of items to purchase
- name/description
- quantity
- unit price
- extended price
- discounts
- net price
- shipping terms and details
- other discounts and surcharges as applicable
- purchase order total
Wait, isn’t all that stuff on an invoice? What’s the difference?
Well, sort of. A purchase order comes from the buyer, and an invoice comes from the seller.
Before you say “Duh!” and move on, though, this actually matters. The purchase order is issued before any goods are made or shipped. It’s a statement of intent from the buyer to the seller. “I want 1200 widgets and am willing to pay a total of $120,000.00 for you to deliver them.”
The invoice is the other half of that handshake. It’s issued after the goods are sent to the buyer. “You requested and received 1200 widgets, so you have to pay $120,000.00 as agreed.”
Buyers are committed once they issue a purchase order. This protects sellers from non-payment. The PO also protects buyers from unannounced price changes. Using purchase orders benefits the companies on both sides of the transaction. A good purchase order system helps streamline your purchasing management and connect with your other data and accounting systems.
Do I need a custom purchase order system?
Well, that depends. Have you taken an off-the-shelf PO system for a test drive?
If your company is new to electronic purchasing management or to the formal purchase order process itself, that would be your first step. Select a couple of well-reviewed off-the-shelf solutions for free trials. Ideally, you’ll run the software-based process in parallel with your existing purchasing process, so you can get a good look at how the purchase order system fits your organization.
If the commercial off-the-shelf solution works for you, then go for it! You’ll also want to schedule periodic evaluations to make sure your solution continues to meet your organizational needs. A good time to plan this evaluation is a couple of months before your annual license renewal, if your software involves annual licensing. If not, it’s still a good idea to evaluate annually.
If you decide that off-the-shelf doesn’t fit your organization, either during a trial period or later on, then it’s time to consider a custom software solution.
For more information about custom internal business software, click here.