Learn Purchase Order Basics
In our last article about sales invoice basics we mentioned purchase orders. Today we are going to explain purchase orders and how they can help keep things under control from both a supplier’s point of view and a buyer’s point of view. This probably falls into the “Yuk, more paperwork” department for some of you but bear with me and learn the advantages of using purchase orders. Think big, even if you are a one person operation right now.
What is a Purchase Order?
A purchase order is a legal agreement between a buyer and a seller. You as the buyer order materials or services and agree to pay for what is included in the purchase order once the seller provides said materials or services. As a seller, once you start processing the order you have accepted the buyer’s offer to buy.
Because this is a legal document every thing needs to be clear as to what is being purchased, where it is to be delivered and what the price is. As a seller, if any of the information contained in the purchase order is incorrect you need to get it straightened out before processing the order.
Any changes to the order need to be documented and should be confirmed by both parties.
A purchase order is also known as a P.O. or P.O. number so when you see this box on an online ordering system they are referring to a purchase order.
Purchase Order Template
A purchase order template looks much the same as an invoice.
The top of your purchase order should contain:
Buyer Contact Information
Buyer contact information would include the following and is usually at the top of the purchase order laid out similar to a letterhead:
- Buyer’s name
- Buyer’s mailing address
- Buyer’s phone, fax and email addresses
- Buyer’s website address. Doesn’t hurt to include this. It has the potential of you getting a referral if the supplier gets a request of “Do you know someone who ….” (fill in what you do).
Purchase Order Number (PO Number)
The purchase order number is a reference point for both the buyer and seller. PO numbers are issued sequentially. Be sure to change the number if you are creating purchase orders in a word processor or spreadsheet template.
Have the purchase order number in a prominent spot and large typeface so it stands out.
Date Ordered
Date ordered would be the date the purchase order was issued. This information is important for tracking and determining the delivery date.
In the next row on your purchase order should be the seller’s information and shipping information:
Ship To Information
Shipping information includes:
- Where the materials or services are to be shipped to.
You can write Same in this box if your billing information and ship to information is the same.
- How the items are to be shipped.
An example of stating how the items are to be shipped would be if you have an account at UPS you want the supplier to ship the items via UPS on account.
Including Your Truck means you want the supplier to use their own truck or shipping service. If shipping is free, make a note of it
- You can also include a tag in the shipping information box. This comes in handy when the shipment comes in for a specific job. The person receiving the shipment knows what it is for. A tag is also handy for cost accounting purposed (explained later).
Supplier Information
The supplier information details are laid out like the buyer’s:
- Sellers’s name
- Seller’s mailing address
- Seller’s phone, fax and email addresses.
Including this also makes it quick work following up on an order should you want to make a change or check the shipment will be on time.
- Seller’s website address would also be handy especially if you don’t purchase from them often and want to have a look at their website to make a new order.
Next we will discuss the purchase order description section.
Purchase Order Description
In the bottom section of a purchase order is where the description of what is being ordered.
- Quantity
How many of each item
- Item or service description or name
The supplier may use part numbers as part of the item description.
- Price
The price would be the price listed on their website, your confidential price list or the price you were quoted. If you were quoted a special price for this order, include who gave you the quotation, the date of the quotation and the quote number.
- Total Before Taxes and Shipping Charges
A sub total of the purchase cost before taxes and shipping charges are added.
- Shipping Charges
The caluculated shipping charges for the order. Make a note if shipping is free. Some areas charge tax on shipping charges differently than on the rest of the order.
From an accounting point of view, when looking at costs of doing business and where to some money can be saved this information would be helpful.
- Taxes
The calculation of the applicable taxes. If state/provincial taxes and federal taxes are applicable, show them separately. Makes things easier later when calculating your remittance to the applicable tax department offices.
The purchase order needs to be signed.
Purchase Order Signature
Include a spot for the person who placed the order to sign the purchase order.
Because this is a legal document a signature is required. Also when you get bigger and multiple people are making purchases there is a record of who placed the order when there are questions.
Now you know what the parts of a purchase order are you need to produce a purchase order.
How to Create a Purchase Order
Like sales invoices there are different ways you can create a purchase order.
- A purchase order book purchased at your stationary store.
This is probably the easiest method of creating a purchase order if you are not paperwork or computer savvy. It is also convenient for crews on the road. If you give your road crew a P.O. book, a) Record the beginning and ending numbers in the P.O. book in case they are naughty and don’t had in a copy of the P.O. for the office to use and b) Make it a policy to purchase P.O. books with at least 2 copies in them. One for the person who has the P.O. book and one copy for the office. A 3 copy book might be appropriate, depending on your industry, as the supplier might want a physical copy of the purchase order for their records.
- A template made in your word processor or spreadsheet application.
Don’t forget to change the number next time you use it!
- The third way to issue a purchase order is through your accounting software. This might be more time consuming as you have to fire up the computer or wait for someone in the office to issue the purchase order for you through the accounting software.
Which ever way you decide to issue a purchase order, make sure it is filled out completely and you keep at least one copy for yourself.
A thought on further organization, if there multiple people involved in your business (think ahead as your read this) it would make everyone’s life easier if multiple copies of the purchase orders issued are distributed to the people who need to know about the purchase:
- The shippping and receiving department.
Your shipping and receiving department would need to know things are coming in and make room for them if applicable.
The person receiving the shipment would need to know who/what it is for so he/she can get it to the right person or place.
- The person handling the project.
The person handling the project or job knows what has been ordered and when to expect the material or service.
If it’s you running the project, if you put a copy of the purchase order in the project file or attached to the workorder you know it has been ordered and that piece of paper is a trigger to follow up to make sure the delivery is on time.
- The accounting department
Ideally, the purchase order is matched up with the shipping documents your shipping and receiving received to confirm the order is complete and the purchase order, shipping documents and invoice are all matched up to confirm the invoice received is correct. Staple them all together and file away. Your record for the tax auditor when they come so they don’t have to bother you.
Why bother doing all this? There are advantages to getting into the habit of issuing purchase orders right from the start.
Advantages of Issuing Purchase Orders
The above might seem like a lot of work, especially when you are a one person operation (for now) but there are advantages to using purchase orders.
- Keeps you organized as to what you are purchasing for the business.
- Should you become ill someone can step in and see where you were at with an order or project then step in to continue the business while your recover.
- Your accountant is going to want to do a profit loss report at the end of the year. A profit losss report compares how much money you brought in (your sales invoices) and how much your spent (your purchase orders plus salaries, utilities, etc.).
- You save time when the tax auditor comes by. Just point them to the filing cabinet instead of you finding the appropriate papers scattered around the office or somewhere on your lonesome computer.
- Great preparation task for when your business grows enough that you have to hire staff. Everyone can pick up the ball when someone in the office is out or off sick.
- Can do cost accounting
If you keep track of your sale price for a job (or item) and the costs to sell that item before including your overhead you can determine if this type of job or product should be sold at a higher price or if you can save some money somewhere and pass on the savings to customers which would increase the volume of sales.
By doing cost accounting as you go, you know right way whether you are making money or loosing money instead of at the end of the year when your year end is done.
- Inventory control
If your business relies on inventory being on the premisses issuing purchase orders will let those concerned know that another X of that item is expected on Y when you are running short. Commitments on delivery can be adjusted at the time the order is placed thus keeping customers happy that you let them know their order is going to be a little late ahead of time instead of waiting for the “Where is my order” call.
No one likes doing paperwork but it is a necessary evil when running a business. You either have to do it yourself or spend money (and time explaining what you did) to have someone else do it for you. The easier you make it for your accountant to put together your taxes, the better for you financially and time wise.
Get organized now! Start using purchase orders. All it really takes is a trip to the stationary store to purchase a purchase order book to get started.
