Purchase order refers to a document generated by the buyer, authorizing a purchase transaction. The purchase order becomes a contract once it is accepted by the seller. In that case, it becomes a contract that is binding on both the buyer and the seller. While sending a purchase order, the buyer should always clearly communicate their requirements to the seller so that no confusion crops up when the order is received.
Certain aspects printed in a purchase order identify a specific seller. These include; quantities of the products, discounts, agreed prices, terms of payment, shipment methods and other relevant terms and conditions. A proper and effective purchase order is highly specific and to-the-point. These orders are also a successful aspect of all entrepreneurial programs.
What is the importance of a purchase order?
Purchase order plays a significant role in clear and explicit communication between the buyer and the seller. These orders also protect the sellers, if the buyers refuse to pay for the goods and services they have purchased. Again, these orders also provide the necessary economies in which the purchasing methods are streamlined to a standard process. However, besides this, there are also innumerable other benefits associated with a purchase order. Some of them are listed below.
- Approves the relevant costs before they are incurred. This is probably the main benefit of a purchase order. This order approves the relevant expenses or purchases before the cost is incurred. This also allows the companies to proactively run their projects by managing their budget and understanding their costs better. It puts in the necessary approvals at the beginning of a purchase. These orders also notify the suppliers and the venders about the team members and their specified limits of approval.
- Internal controls are enhanced. Two necessary aspects of internal control are, the items received against the order and the cost of the items. A unique and proper PO number is the relevant key reference number that is necessary for the document. It also becomes the control number that is responsible for linking the purchase order, the ticket of the delivery and the invoice. The numbers are placed in a sequential manner in order to add a level of control and limit all scopes of abuse.
- Committed costs are well managed. Purchase orders are also responsible for managing the committed costs. While executing a purchase order by the buyer and the seller, the order commits both parties to comply with the terms on it. The committed costs of an order are the costs that have been committed but are not incurred. This is highly viable for the items that are in huge demands and which require higher and longer times of the lead.
- Profitability of a project is improved. Very often, buyers and sellers judge their profitability by looking at the total costs incurred. However, this is a major mistake and is a partial picture. In order to understand the real profit of a project, the committed costs have to be included in the process of analysis. This is well carried out by a purchase order. So integrate the purchase orders to your business and enjoy high standing profits, in the long run. Good Luck!!