What is a Purchase Order (PO)? Functions and Benefits for the Company

what is a purchase order


what is a purchase order

PO stands for Purchase Order which is generally interpreted in Indonesian as “Pesanan Pembelian”.

Lately, we have often heard the word or the term “Open PO”, especially during the Covid-19 pandemic had made us change the way our business. Previously preparing goods for the stock, then selling them. Now it has changed to we want to get orders first then prepare the goods. This, will help us to be able to prepare and manage stock more easily and according to demand.

What is a Purchase Order? and Its Function?

What is a Purchase Order? and Its Function?

Purchase Order (PO) is a document made by the buyer/customer to show the goods they want to buy from the seller/supplier. A purchase order is a contract that forms an agreement between the buyer and the seller regarding the goods that the buyer wants to buy.

Also read: Examples of Good and Correct Offer Letters

Generally, before the buyer sends a Purchase Order, the seller has made a Purchase Quotation. So that the details of the goods including the specifications, the price of the goods, and the number of items in the Purchase Order are based on the previous agreement. This is what makes Purchase Orders binding. The seller must commit to delivering the goods and prices as stated in the Purchase Order. Therefore a Purchase Order is referred to as a buyer and seller contract agreement.

Of course, not all companies as buyers use a formal Purchase Order document and send it to suppliers, there are various reasons such as

For micro and small companies, orders are generally carried out between business owners as buyers and sellers manually, such as orders over the phone, nowadays it is also common to use chat applications to avoid mistakes, and with the chat application, the Purchase Order history will also be recorded. This is very common because it is based on trust and also because the number of orders is still limited so that it can be remembered even without proper recording.

Also read: What is a Sample Collection Letter and How to Collect Debt Successfully

However, with the development of a company, business owners no longer carry out their orders or serve buyers personally. At that time, making Purchase Order documents became a necessity to avoid errors or delays in the delivery of goods.

Functions and Benefits of a Purchase Order (PO)

  1. As proof of the order of goods from the buyer, and the commitment of the seller as the recipient of the order.
  2. Avoid mistakes in ordering goods and the product specifications, it must be listed in detail on the Purchase Order.
  3. Avoiding mistakes in the Order Quantity.
  4. Avoiding errors in the purchase price of goods. So that at the time of billing from the seller there is no price difference.
  5. Remind the seller to commit the provision of goods according to the order and the time required.

What Information Should Be in a Purchase Order (PO)?

In order to get the maximum benefit from making Purchase Order documents, the following information below must be included in the Purchase Order. The contract between the buyer and seller becomes clear, and both parties can fulfill their rights and obligations. Both parties get an advantage, where the buyer gets the goods at the right time at the right price, and the seller delivers what was promised at the right time. Both parties have a win-win solution.

definition of purchase order

The following information must be contained in the PO document with Example:

  1. Buyer Identity

    Company name and / or name of person / staff who made the purchase order.

  2. Buyer’s Address

    The address is very important because this concerns the address where delivery of goods is expected. This is especially important if the buyer has many warehouse locations, or if you sell retail and have many stores.

    Writing address clearly is very important because the impact is very bad when a wrong delivery occurs because of the shipping address.

    It must also be a concern if, in one Purchase Order, there are many delivery locations, for example, there are orders for 100 pieces of goods, but delivery is made to 3 different locations, this must be clearly stated how many items are ordered for each location.

    Another address that must be a concern too, if the Billing Address is different from the delivery address for the goods, this generally occurs when the goods are shipped to warehouse locations that are spread across many locations, but billing is only at the head office address.

  3. Date of Purchase Order

    The date of the PO is important because it shows when the PO was made, this is to notify the Seller when the Purchase Order of Goods has been made.

  4. Date of Goods Arrive Schedule

    PO is a contract, it is important to include the date the goods are expected to arrive at the buyer. Thus, the seller can provide the appropriate service. Because the goods cannot be fulfilled on the expected date of arrival, then it may result in large losses to the buyer. For example, the goods are raw materials needed for scheduled production. Delay in the arrival of only one part of the Raw Material, can result in the production process being stopped and giving a big loss.

  5. Payment Terms

    The payment Terms or grace period is very important in a Purchase Order, for example, payment is due 30 days after the item is received. Why is this information important? Because the longer the period owed or the grace period is due to the goods received, the more profitable it will be for the buyer.

    This grace period is one of the determining factors for the seller to determine the price of the goods. For example, if the buyer wants to pay cash when the goods are received, they will generally get a lower price than the payment due 30 days after the goods are received.

  6. Detailed information on the ordered goods

    The details of the items ordered are of course very important

    • Item Code.
      Item code is very important, especially if your goods have many types and even have a variety of sizes. and if your goods are difficult to distinguish with the naked eye. The use of item codes in a Purchase Order is mandatory.

      For example: if you want to order clothes, where 1 model has a variety of colors, and also sizes (S / M / L) then using a unique code for each Model, Color, and Size in your order will be understood with certainty by the seller. If you only explain the naming of goods without a unique code, chances are that the seller doesn’t understand what you mean.

      The following example is an explanation of Coca-Cola:
      049000050103 – Coca-Cola Coke Classic 67.60 oz
      049000004632 – Coca-Cola Single Glass Bottle 12.00 fl oz
      049000608779 – Coca-Cola Coke Classic Can 12 oz
      049000429183 – Coca-Cola Diet Coke Can 12 oz

      In the example above, if the Purchase Order from the buyer uses the item code, different items will automatically be seen. This will be even more useful if you use a barcode system, and computerize sales in your store.

      Purchase Order with iReap POS Apllication

    • Goods/Item Description.
      Description of goods must be explained completely and clearly in a PO document. In the previous example, it can be seen that the description of the item must come to the specifications, for example, color, size.

      The description must also be clear, not confusing, for example, on one item, the description of the size is in front but, in another item the description of the size is at the back. This will certainly make it difficult for sellers, which can result in errors reading your order, of course, errors in sending goods that are not what you expected.

    • Number of items and unit of measure ordered
      After the Item Code and Description, of course, the quantity of goods must be clearly stated in the buyer’s Purchase Order. A mistake that is often made is when ordering goods, only the number of items is stated, but there is no item-unit or Unit of Measure.

      In the previous example, if we used the item code, it usually points to a certain unit of measure. This is because item codes differentiate units as well. However, if your item code has not followed the unit and you only use the item description when making a Purchase Order.

      For example, when the seller receives an order that only says 12 oz Coca-Cola Coke Classic Can, as many as 100. The seller will be confused whether this is 100 cans/piece or 1 dozen or 1 box ?. So in the Purchase Order, the buyer must also include the Item Unit of Measure in addition to the quantity of goods.

    • Purchase Price.
      Finally, the price of the goods ordered must be written in accordance with the agreement between the seller and the buyer, the price of this item can be included in the purchase price per unit and in total. Both the total value of purchases per item and the total value of the total purchase of goods in one purchase order document.
  7. Sample PO (Purchase Order) Document

    example of a company purchase order
    Sample Purchase Order
    sample purchase order
    Sample Purchase Order

With complete information in a Purchase Order, this will greatly assist the certainty of the purchase process from the vendor, regarding goods, prices and delivery addresses.

In addition, the Purchase Order document not only functions as information on goods that the customer wants to buy from the vendor, but also as a letter of agreement between the buyer and seller on the price and terms of payment.

Also read: How to Calculate the Selling Price of Your Product to Get Big Profits?

This is an explanation of the importance of making a Purchase Order in a company. You can use the manual method, for example using Microsoft Excel to create a PO.
Or use a variety of applications that are already available that can help you speed up the PO making process and can monitor the arrival of goods, such as SAP Business One which can help you monitor the purchase process starting from Purchase Order – receipt of goods – vendor invocing and payment to vendors.

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