It is imperative that you understand the different types of purchase order and how to use each of them effectively. We are going to run you through the finer details and further your level of knowledge in this area.
Simply put, a purchase order is a contractual agreement between a supplier and a buyer. This document becomes legal as soon as the details of the purchase order are accepted by the supplying company. Information such as the goods or services supplied, as well as the terms of purchase will be included here.
Purchase orders provide order numbers, information on items sold, and generally help businesses to keep track of what has been bought. The order numbers will align with invoices and delivery notes, so everything can be easily identified by the supplier.
What is a purchase order used for?
A purchase order is used for a buyer to confirm details of an order, it is part of the invoice cycle. They are also useful when trying to keep tabs on your venture’s cash flow and stock levels, as the documentation will include details on when cash is due to go out of the company and when new stock will be arriving.
Suppliers also make use of purchase orders; this is because any disputes over orders can be settled by referring back to the initial agreement.
What are the different types of purchase orders?
We will now walk you through the four types of purchase orders available today.
Standard purchase order
This is the most common type of purchase order and can be found in use regularly in the modern world. These are used for single orders where all information is known and able to appear on a purchase order form.
The addresses, products to be purchase, number of items needed, the overall price of the order, and the delivery date will each be included.
Blanket purchase order
Blanket purchase orders refer to orders that will be repeated over multiple dates across a specific time period. Here the customer will usually place an order for goods or services they know they’ll need more of in the future.
This is normally used for expandable goods as the customer will not be able to hold all the stock at one time, and orders will likely involve differing quantities and amounts. Multiple payments will be required with a blanket purchase order.
Planned purchase order
Planned purchase orders are exactly what they sound like they are. It is putting a plan in place to purchase products or services from one supplier over an extended period of time. Here, the buyer will become legally bound to commit to the price and the quantity of the thing they are buying but may not initially be aware of the delivery dates.
Therefore, the information listed on a planned purchase order is a little different to the other order types. Here, you will find possible delivery dates that are yet to be finalised, as well as information on the goods or services required.
When a stage has been reached where the finalised delivery dates can be confirmed, the buyer will submit a release form to the supplier.
Contract purchase order
A contract purchase order is used when a buyer is as of yet unaware of what they will be purchasing but wishes to create a contract purchase agreement with a supplier. This will help them to determine what the terms of the agreement will be.
This agreement will form the basis of a future commercial relationship between purchaser and supplier and will likely include information on potential payment and delivery.
How to raise a purchase order
A purchase order template will normally be used by a buyer in order to raise a purchase order. This will contain the necessary details and be sent to the supplier.
In today’s world you have multiple options at your disposal. You can send your purchase order online via email or post a hard copy directly to the supplier. The supplier will then negotiate or agree terms with the buyer, and once agreed, the goods or services will be shipped to them.
An invoice will then be issued to the buyer, and they will have to complete payment within the previously agreed timeframe.
How to create a purchase order
Here are the necessary steps you must complete if you want to create a purchase order yourself:
- Generate a purchase order number. This helps both buyer and supplier cross check with deliveries and invoices.
- Detail the name and address of the buyers and name and address of where the goods or services are set to be shipped.
- Information on the shipping including how long it will take and what method of shipping is required.
- Write down the name and address of the supplier, including details of your contact at the supplying company.
- Include the payment terms, order details, delivery, shipping and any other relevant information.
List the items to be bought, the quantity required, the agreed price, and the total amount to be paid
Benefits of using purchase orders
The are a number of benefits for using purchase orders. The advantage for a buyer is that the purchase orders are useful tool for tracking inventory and purchase history. Pit allows the buyer to order the goods in advance without having to pay right away or financing.
The seller has a number of advantages also, purchase orders help track inventory, recurring orders. Purchase orders allow a documentation to commit the buyer to paying once the order is fulfilled. This gives the seller peace of mind and legal security.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.