What is a purchase order? Many people may ask especially those entering the business world. Most people, however, have come across a purchase order, even if it is just a glimpse of it. You may however face a dilemma when asked, What is a purchase order?

A purchasing order is one of the business documents sent between a buyer and a supplier. The format of creating a purchase order varies depending on what you wish to include on it. A purchasing order is used by businesses to indicate a spending that will be done in future. Below are some of the facts and ideas you need to know to easily learn what is a purchase order.

What Is a Purchase Order?

A purchase order (PO) is a document that a buyer sends to a supplier. It indicates the item, quantity, and price for a certain order. The effectiveness of POs enhances through the specificity of each document. This means that a well detailed PO is more effective. Once the supplier accepts the terms of the PO, he/she forms a legal binding contract with the buyer.

In a business, POs are taken through a long process to ensure that all approvals are official. This being the first business document between the buyer and supplier, it is vital that the PO is accurate.

Who Needs POs the Most?

Buyers send purchase orders to their suppliers indicating the type, quantity, and price of an item as agreed upon. The POs help the buyers determine their expenses over the operating period. This way, they are sure of the anticipated expenses. If the buyer is a business, then they will be able to determine what months they have the highest expenditure.

Having visible spending will go a long way allowing the business to manage its cash flow effectively. This is due to better decision making skills and accountability. The suppliers on the other hand will be able to respond on time to the buyers. Hence, they are meeting their demands leading to increased returns.

How Much Is Usually Spent on Purchase Orders

  • According to a report published by APQC on Open Standards Benchmarking Collaborative, various procurement offices spend varying amounts of money in making purchase orders. The organization noted that the cost of making POs ranged from $35.88 to $506.52 based on the capabilities of the procurement department. The time it takes a procurement department to make a purchase order also matters to a business because it is a resource like any other.
  • The leading businesses across the world tend to work on about 2,214 purchase orders per year. Meanwhile, those lagging behind only executed 248 purchase orders. To be able to execute many purchase orders, most procurement officers in businesses apply the automating process.
  • Interestingly, the APQC report indicates that the companies using the automated process spent about $7.41 on purchase orders.
  • In contrast, the businesses without automation spend about $19.21 on executing purchase orders. While this makes work easier, businesses are also able to profit through reduced expenditure on purchase orders.

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2 Main Ways to Reduce Purchase Order Spending

The procurement offices in any business receive tasks with the role of identifying all the possible ways of reducing spending. For commercial purposes, businesses execute purchase orders and like many other sources of expenditure, POs have their share. While learning what is a purchase order, we cannot deny that reducing the cost spent on POs is of paramount importance.

Some of the applicable cost reduction strategies include the below.

1. Use of the Automation Process in Executing Purchase Orders

With automation, businesses are able to ensure that all their purchase orders are in one common place. This way, anyone can access the Purchase Orders when necessary for procurement solutions. With the automation process, business individuals also find it easier to process purchase requisitions. This is because of the automated vendor catalogs input. These purchase order executing systems are also beneficial since they help hasten the PO approval by the officials. This is also easier and simpler due to the ability to create an approval workflow such that the ones that approve, receive the POs and sign them in a timely manner.

E-procurement software enable business individuals to create and share purchase orders easily and within a limited amount of time. Automated systems that execute purchase orders are a great way of reducing the cost spent on them by the procurement. Being able to see the purchase orders at a glance since all the directory is centralized allows businesses to identify all the approved, rejected, sent and unattended to orders. So, you avoid financial risks because of the system automation. Procurement managers also view time as money and since automation saves on time, it is prudent to say that you save money too.

2. Acquire the Right and Best Procurement Tool Set

Obtaining the best tools for every procurement activity is another way to help businesses reduce the cost spent on purchase orders. For instance, let’s say that the procurement software in place is able to conduct an accurate expenditure analysis adequately. Then, a business is able to identify what activity uses most of the firm’s resources when drafting a budget.

Compiling of supplier data also helps businesses reduce on the time and cost of executing certain purchase orders.

Wrap Up

Therefore, for those of you looking to learn more about what is a purchase order, I believe this article will be reliable. Purchase orders are a normal thing in businesses especially with the need to officiate every aspect of a firm’s operations.

As such, you ought to know certain facts about purchase orders. With such knowledge, you will know how to use purchase orders efficiently and how you can reduce the money spent on them.

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