Everything you need to know about purchase orders to run your business smoothly
Every business has to order materials, supplies, and products in order to function. Every product you use – from printer supplies to wholesale products you resell – all have to come from somewhere.
Many small businesses start out with the owner making their own purchases, investing time and money in the business, and building stock. Over time it becomes necessary to calculate stock turn, which is the number of times a particular item is used or sold within a particular time period.
But you can’t calculate anything without having an accurate account of your own inventory and how much you spend on it. Purchase orders fulfill this need and set the stage for workflow optimization through process automation and other time-saving steps down the line.
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A purchase order is a legally binding contract between a buyer and a supplier. It identifies exactly what items the buyer agrees to purchase, the price of each item, and the terms of delivery and fulfillment.
Buyers generate purchase orders to stipulate the terms of business transactions to their suppliers. Large enterprises often do this through a dedicated purchasing department that reports to accounting. But small businesses can also capitalize on efficient purchasing proccess to improve inventory management and control cash flow better.
Today’s businesses often use digital forms to agree to purchase order terms and conditions. This is an example of what a digital purchase order request form looks like:
As the purchase order example shows, the form contains all of the items the buyer wishes to purchase in a single, easy-to-manage document.
It clearly communicates all of the relevant information that a supplier would want to know in order to fulfill the order. A purchase order should include the following elements:
Buyers generate purchase orders and send them to suppliers in order to authorize, process, and fulfill the transaction. Invoices work the opposite way – when a supplier issues an invoice, it means the transaction has already taken place. The supplier generates the invoice and sends it to the buyer.
Businesses that use purchase orders are able to enjoy advantages that would not be available to them otherwise. The purchase order is a legally binding document. Use it to establish a sense of trust that allows you to purchase items on account, potentially delaying payment in order to move towards a more efficient cash conversion cycle.
With a faster cash conversion cycle in place, your business could finance growth without having to resort to expensive financial instruments, issuing stock, or borrowing. This allows small business owners to leverage some attractive benefits:
The bottom line is that the better you manage your cash flow and inventory velocity, the more likely you are to have cash on-hand when you need it.
Getting a head start on accounting for business purchases can be a competitive advantage all on its own, but process automation turns the purchase experience into a streamlined system that generates real profits.
For instance, imagine a business that issues its own purchase order forms and develops an automated management system for handling those purchase orders. This business will be able to accomplish a lot of things with the click of a single button:
All of these benefits serve to make the purchasing order process simpler and more accurate. Automation reduces the potential for error while maximizing the speed of communication. Instead of your accountant sending an email, a customized system updates itself based on real-world purchase data that you can analyze and monitor at any time.
If you’re enthusiastic about getting started on proactive inventory optimization and process optimization for your business, you’ll need a purchase order template that you can easily modify to use with your business. Here’s one you can download and use right now. Make it part of your purchase process and start running your business more efficiently!