What Is The Difference Between Purchase Order And Sales Order?
The documents like purchase order and sales order depict purchase transactions and sales taking place in a business. But clarity regarding sales order vs. purchase order is necessary. When the buyer requires a product, they create a purchase order on the seller or the material supplier. This purchase order consists of product/services, price, quantity, and other terms and conditions. A sales order is a document issued by the seller or supplier of the material confirming that the product ordered in the purchase order is being delivered to the buyer.
Understanding Purchase Orders: A Complete Guide
Purchase orders are an important part of any business's procurement process. This comprehensive guide covers everything you need to know about purchase orders, including what they are, the different types, how they differ from invoices, and tips for using them effectively.
What is a Purchase Order?
A purchase order (PO) is a commercial document issued by a buyer to a seller, indicating the type, quantities and agreed prices for products or services. It is used to control the purchasing of products and services from external suppliers.
Key details in a PO include:
- Product/service descriptions
- Product quantities
- Agreed prices
- Delivery date
- Payment terms
- Shipping and billing information
A PO is crucial for managing cash flow and ensuring the order and receipt of purchased goods or services. It also serves as a written evidence of the transaction.
Types of Purchase Orders
There are several types of purchase orders:
Standard Purchase Order
A standard PO is for one-time purchase of goods with immediate delivery. It outlines the specific products or services being purchased along with exact quantities required and agreed prices.
Blanket Purchase Order
A blanket PO establishes an agreement between buyer and seller for future purchases in which product quantities are not yet defined. It outlines negotiated prices and delivery terms for goods over a period of time.
Planned Purchase Order
A planned PO works like a standard PO but is created for repetitive purchases from a supplier. It outlines a schedule for future delivery of goods over a period of time to meet regular production requirements.
Contract Purchase Order
A contract PO formalizes a contract with a supplier for long-term supply commitments. It defines negotiated prices, terms and conditions for goods to be supplied on an ongoing basis over a set contract period.
Purchase Orders vs. Invoices
While related, purchase orders and invoices serve different procurement functions:
- A purchase order is issued by the buyer, detailing the requested products/services and terms prior to a purchase being made.
- An invoice is issued by the seller, detailing the products/services actually delivered and the payment amount now due from the buyer.
The invoice will match the purchase order if the delivered goods and prices match the requested quantities and agreed prices.
Tips for Effective Purchase Orders
Follow these tips to ensure purchase orders support proper procurement controls and processes:
- Clearly specify delivery terms, product details, quantities and prices
- Keep file copies confirming receipt of goods as per the PO
- Match invoices to PO details to verify accuracy
- Use consistent PO numbering for tracking and monitoring
- Have established authorization protocols for PO approvals
With a strong understanding of purchase orders, you can strategically manage cash flow and operations. Reach out if you need any assistance creating or managing POs for your business.
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FAQs
What details are typically included in a purchase order?
Details in a standard purchase order include product/service descriptions, quantities, unit prices, delivery date and address, payment terms, shipping details, and more.
Why are purchase orders important for a business?
Purchase orders allow businesses to clearly communicate purchase requirements to suppliers. They provide control over procurement spending and help manage cash flow by delaying payment until after receipt of goods.
What are the main types of purchase orders?
The main types include standard POs for one-time purchases, blanket POs for undefined future quantities, planned POs for recurring purchasing, and contract POs formalizing long-term supply agreements.
What is the difference between a PO and an invoice?
A purchase order is issued by the buyer outlining requested items, quantities and agreed prices, while the invoice is issued by the seller outlining items delivered and total payment now due.
When should a business use a blanket purchase order?
Blanket purchase orders should be used when there is an ongoing need for goods from a supplier but exact quantities are unknown. The blanket PO defines terms for future purchasing over a set period of time.
What approvals are required for purchase orders?
Businesses should establish PO approval protocols designating who can issue, review and approve purchase orders based on factors like spend amounts and types of goods.
How can purchase orders improve supplier relationships?
Clear PO processes promote accountability on both sides, while enabling collaborative planning and forecasting between buyer and supplier to build relationships.
