How to Set Up a Purchase Order System for a Small Business

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Picture this: you call a supplier to order some widgets and shoot them an email to confirm. The problem is, they send you five cases instead of four and land you with a bigger invoice than you were expecting. Since you don't have anything legal to hold that vendor accountable, you don't have much come back. You could get angry and threaten to withhold payment, but it could all get messy and ruin your relationship. What to do? In the future, you might consider implementing a purchase order system. POs play an important role in controlling business purchases, helping you to track orders and manage payments for work done.

What Is a Purchase Order?

A purchase order is the official confirmation of an order for goods and services. It acts as a contract between a business and its suppliers, so the supplier knows exactly what's been ordered and the business knows exactly what products and services are going to be delivered, and by what date. When a supplier accepts a purchase order, it creates a legally binding contract between the two parties. So, you'll never be stuck with an extra case of widgets that you don't need, and the supplier is protected because he now has legal proof that goods and services were ordered. If you didn't create a purchase order, there would be no binding order from the customer at all.

What Do Purchase Orders Look Like?

Purchase orders look a lot like an invoice. The only difference is, the buyer creates them, not the seller. Generally, a purchase order will comprise the following information:

  • Buyer's company information.
  • Shipping/ billing address.
  • Supplier's company information.
  • Details of the order – product, quantity, price and delivery date.
  • Purchase order date.
  • PO number. 

There may be specific conditions about the order, too, such as when the payment should be made. Many businesses create a standardized purchase order document with generic information filled out to ensure consistency.

What Is a Purchase Order Number?

If there's one item on the purchase order you must include, it's the PO number. The PO number is a unique reference number that makes it easier for you to match deliveries with purchases when they arrive. Using them should speed up your invoice processing because you can easily track when payments have been made on specific orders. It also minimizes the risk of incorrect payments as you won't be paying out on invoices that don't have a corresponding PO.

Here's an example. Suppose you need a new set of filing cabinets. You create a purchase order with the size, quantity and specific requirements for the cabinets and send it to the manufacturer. Once the manufacturer approves the purchase order, it creates a legal contract between the two parties. The manufacturer will ship you the cabinets and send an invoice for the total amount that is due. That invoice will reference the PO number. So, when you receive the invoice, you can check it against the purchase order to make sure the two documents match. If they do, go ahead and pay. If they do not, someone's made an error that you need to investigate.

How do You Integrate a Purchase Order System Into Your Business?

If you've never used POs before, you'd be forgiven for thinking it's as simple as setting up a purchase order template in Microsoft Word or your accounting software. These options are great for creating a physical purchase order document, but there are some additional things you need to think about before you can integrate a PO system into your business:

Who's doing the purchasing?

A primary purchase order administrator should control the purchase order system. This will centralize your purchasing and give you a clear record of how much money is being spent. As soon as a PO is created, the administrator can immediately factor the cost into the company budget. Essentially, you'll start by taking credit cards out of the hands of general staff.

What's the process for raising a requisition?

Every PO process starts with a requisition. This is a purchase order request that employees make whenever they need to buy goods or services. You'll need to create a standardized requisition template, which all staff members must then use. Many small businesses allow their staff to simply email their request to a manager, who will liaise with the administrator to allocate a budget, get approval for the purchase and raise the necessary PO.

Adding a requisition system ensures that staff must get a centralized thumbs up before they purchase so nothing slips through the cracks. Soon, you'll have enough data to track how employees are using supplies and spot purchasing patterns, such as, are there opportunities for discounted volume purchasing from a supplier?

How will you log the PO?

Administrators can choose to approve, reject or flag a requisition for further discussion. Once the requisition is approved, the PO administrator must allocate a PO number to the order – you can use any alpha-numeric code you like – and record it on a PO register. Maintaining a register ensures you keep a running total of purchases. You can see the impact of a requisition before you approve it, and update your budget every time a PO is raised. It's also a key part of audit trails, ensuring there are no discrepancies between supplies coming in and payments going out.

How will you manage vendors?

Of course, you'll need to let your suppliers know that you're moving to a PO system. This is as simple as contacting your vendors and informing them you'll be submitting a purchase order before you make any payment for goods. How you get the PO to the vendor is up to you – most often, the administrator will email it directly to the recipient.

Once the vendor receives your purchase order, they should check it carefully for errors before preparing the goods to be delivered. Many larger vendors are used to PO-backed purchasing and have systems set up that will flag your account if you attempt to purchase without a PO.

How will you reconcile invoice payments with the PO register?

If you maintain an up-to-date PO register, then reconciling invoices or credit card statements against the purchase order is not especially difficult or time-consuming. You're just looking to flag any purchase that was not recorded with a PO. Then, it's a case of training staff to eliminate any excess purchases in the future.

Should you Automate the Purchase Order Process?

Instead of doing things manually, you might choose to invest in some purchasing software for small business owners. These systems can automate your requisitions and routine approvals and generate POs automatically, which makes the whole thing a lot less challenging. They also manage your purchasing documents from one centralized in one location, accessible from anywhere, which makes it easier to manage purchase orders on the go. Some systems have other useful features, such as a supplier catalog to make purchase requisitions easier and more convenient for your employees.

Platforms are as broad as they are long, and there are plenty of review sites online to help you narrow down the options. As always, take advantage of the demos and free trial periods, so you're confident you've made the right decision before you buy.

References

About the Author

Jayne Thompson earned an LL.B. in Law and Business Administration from the University of Birmingham and an LL.M. in International Law from the University of East London. She practiced in various “Big Law” firms before launching a career as a business writer. Her articles have appeared on numerous business sites including Typefinder, Women in Business, Startwire and Indeed.com.