An introduction to purchase orders for South African businesses

What is a purchase order (PO)?

If you buy products or supplies for your business, you issue a purchase order to your supplier stating what you want to purchase, the quantity you need, and the agreed amount you will pay.

It’s a legal document that streamlines purchases between buyers and sellers. Purchase orders enable smoother and more predictable transactions.

A purchase order is a legal and binding agreement

A purchase order contains all relevant information pertaining to the sale. Upon acceptance by your supplier, you now have a legally binding contract. It makes the control and proper documentation of all your purchases from suppliers so much easier, as each purchase order has a unique order number that helps both parties keep track of deliveries and payments.

Purchase orders allow you to place an order without paying for the products immediately. It safeguards the supplier against unnecessary risk, as the order guarantees he will receive payment for his services.

How purchase orders can help your business grow

When your business is still in the start-up phase, you might feel that the paperwork associated with purchase orders is just too much as you already have good relationships with your suppliers. Your purchasing processes are still simple and straightforward. As you grow, however, this hands-on approach not only gets more difficult, but your relationships with suppliers also become more complicated.

Soon purchase demands will become more urgent, and complex communications will open up more room for error. Purchase orders contain detailed information to make the ordering and tracking of goods and services simpler to navigate, leaving you more time to attend to business.

Purchase orders versus invoices 

It’s important to know that a purchase order is not an invoice. An invoice is an additional document that follows the purchase order. When the seller has delivered the purchase order, he will issue an invoice, which is an official request for payment for the delivered goods.

Information on the invoice includes payment details, the purchase order number, and the timeframe for delivery. The purchase order is the legal agreement you’ve made with the buyer to pay a certain amount for products or services delivered within an agreed timescale. The order contains information on the types of products/services ordered, etc.

When to introduce purchase orders

When control gets more difficult, and your team expands, you need to think of how you can streamline your purchase processes. This will be the right time to design a purchase order system that caters to your specific needs.

Pros and cons of purchase orders

The advantages of POs for your business definitely outweigh the disadvantages, but as a business owner, it's advisable that you are aware of both.

Pros 

• Buyers do not have to pay immediately for products upon ordering.
• Suppliers can extend credit without any risk.
• The cash flow benefits for the buyer are obvious.
• Purchase orders streamline financial management and make inventory much easier.
• POs enhance budgeting since funds must be available before the order is issued.
• Buyers can schedule deliveries according to their needs.
• Faster delivery of goods because deliveries are scheduled.

Cons

• The buyer has to pay for the goods prior to selling them for profit, which can put pressure on its cash flow.
• The creation of a purchase order can be arduous.
• It usually involves lots of paperwork, even for smaller purchases.
• Using a credit card can be as effective to pay for goods.

The four types of purchase orders

1. Standard purchase order
   
   This order is the most popular among smaller businesses as it usually comprises only a single order that is easy to manage.
   
   
2. Planned purchase order
   
   Sometimes you prefer to commit to buying goods or services from only one supplier over the long term. This order legally binds you to commit to quantity and price, without knowing future delivery dates. It contains information such as the type of goods, quantities, price, and possible delivery dates. You only submit a release form to the supplier once you know the delivery dates.
   
   
3. Blanket purchase order
   
   You can use this order when you plan to place repeated orders with the same supplier to be delivered on various dates over a set period. These orders require more than one payment. It's mostly used for consumables.
   
   
4. Contract purchase order
   
   If you’ve not yet indicated to your supplier what you want to buy, but you want to establish a contract purchase agreement to determine the specific terms, you can use a contract purchase order. It contains payment and delivery information and sets the platform for your future relationship with the supplier.

Formats to suit your needs 

1. Electronic purchase orders: Nowadays most purchase orders are done electronically. It’s an established practice to use electronic purchase orders to acquire almost any product or service. These orders are known as E-Procurement, E-Purchase Requisitions, or E-Purchasing. 
2. Non-electronic purchase orders: If you prefer to keep a paper trail to enable proper recordkeeping of transactions, you will probably prefer the proper purchase order format.
3. Purchase order requests: This is an internal document within a company to get purchased goods or services. This document supplies the purchasing department with information such as the type of items, quantity, source, and cost estimates. Authorization is granted through a purchase requisition. 

Step-by-step purchase order process

The buyer creates a PO and sends it to his supplier. He usually uses a purchase order template with all the details of the purchase. This is then mailed to the supplier who then, in turn, negotiates terms with the buyer. Once both parties are in agreement about the order, the supplier will then ship the requested goods to the buyer. Upon receipt of the goods, the supplier will issue an invoice for the amount to be paid by the buyer within the agreed timeframe.

Vital information on purchase order agreements 

• PO number that enables both the buyer and supplier to cross-check deliveries and invoices.
• Name and address of the buyer(s) and address where the goods or services must be delivered.
• Name and address of the supplier with contact details.
• Shipping details such as the timeframe of the order and the method of shipping.
• The terms of payment, -delivery, and -shipping.
• An inventory of the items, quantity, set price, and total amount due. 

The purchase order process

1. You decide to acquire certain goods or services for your business.
2. You issue an electronic purchase order to your supplier.
3. Upon receipt, your supplier confirms whether or not he can supply your goods. If not, you cancel the order.
4. Your supplier finalises your order and prepares it for shipping.
5. Your order (containing the PO number) is then dispatched to the specified location.
6. You are invoiced by the supplier who uses the PO number to match your order to the delivery information.
7. You pay your supplier’s invoice according to the specified terms on the order. 

Legalities to keep in mind

• It’s vital that you communicate your requests to sellers in the clearest way possible in order to avoid any potential confusion.
• Should you refuse payment for whatever reason, the seller is still protected due to the legal status of the document. You’ll have the same protection once you’ve received your purchase order confirmation.
• Once accepted by both parties – buyer and seller – a purchase order is regarded as a legally binding contract.

Are purchase order agreements safe?

The terms and conditions on your purchase order represent the legal contract between your business and your suppliers. They protect your interest and offer legal protection should problems arise from the agreement. Terms and conditions provide details on pricing and delivery and the laws that need to be adhered to.

They protect you by:

• giving a transparent legal framework that has been evaluated by lawyers and guides all transactions.
• reducing opportunities for litigation as responsibilities are clearly defined and expectations specified.
• enforcing adherence and limiting liability which, in turn, decreases your risk as your suppliers are legally obligated to comply. 

On the purchase order trail

It’s crucial that you track the PO up to delivery, as you have to make sure that you get the products or services you’ve ordered, so you only have to make a single payment on the order. The ways in which you track the order will depend on the size of your business.

Purchase order book or template form: Start-ups usually opt for these since the owner or one or two employees are the only ones involved in the process. This method works well for single and straightforward orders.

The bigger the company and the more people involved in the process, the easier an automated system will make tracking. It’s just more effective to keep track of multiple orders and deliveries this way. If you digitize your order system, it eliminates the need for a designated purchasing department, saving you money in the long run. 

What you need to know

• A purchase order is raised by the buyer and sent to the supplier, and all the details are usually contained in a purchase order template.
• It can be sent via email or posted to the supplier who will negotiate on or agree to the details on the purchase order form and once agreed send the relevant goods or services to the buyer.
• The supplier will then do a follow-up by issuing an invoice to the buyer, and the buyer will then pay for the goods or services within the agreed timeframe. 

Get PO funding in a jiffy

1. Double-check all your documentation and make sure you’ve adhered to all the requirements.
2. Get a quotation from the supplier that proves he’s able to deliver the required goods within the agreed timeframe.
3. Emphasize the due date for delivery when you apply for purchase order finance so that your application gets priority attention.
4. Make very sure that all the required documentation is included in your online application to avoid unnecessary delays.
5. Keep your phone with you at all times when the lender contacts you. 

Let’s wrap up

POs are valuable tools to help you with the day-to-day management of your company as they streamline sales and deliveries, and offer a paper trail that gives you backup and a point of reference when things go wrong.

There’s a variety of online tools available to assist you in creating your purchase order. By using an online electronic purchase order system, you can now easily manage your sales and enable swift payments. POs puts you in charge of your business outcomes and eliminate hassle. 

Purchase orders enable small-business success

1. Purchase orders streamline the purchasing process and ensure that nothing slips through the net.
2. They enable you to improve your budgeting. You can clearly see what you need to buy and budget for those items in advance.
3. Because deliveries are planned in detail, you can send your inventory to the supplier beforehand so he can deliver on time.
4. POs offer a precise audit trail in case of financial deviations, making potential problems easy to solve.
5. It’s a legal contract that protects both the buyer and seller.
6. Many teams are involved in the PO process, ensuring collaboration between departments that in turn, creates transparency.
7. Purchase orders give you the opportunity to state your expectations, such as delivery dates and prices, clearly, and serve as a backup should a delivery suddenly derail.

POs enable you to keep better control of your purchases and sales. They enhance inventory record-keeping and create transparency when it comes to supply and demand. It’s simply a more cost-effective way to make purchases and enable faster sales.