Purpose of a Purchase Order System
In an organization where one department administers budgets, one buys goods and services and another receives and pays bills, purchase orders let everyone know what’s happening -- and track cash flow. Purchase orders, whether traditional multi-copy paper forms or electronic documents, clearly outline proposed transactions linking originating party and potential supplier in shared responsibilities. A well-designed purchase order system serves four vital functions for your business.
A purchase order transmits the specifics of a requisition and the actions required of each party in the system -- from its originator and supplier through accounting and inventory departments at either end of the transaction. A detailed purchase order clearly outlines what is being purchased, from whom and on what terms. Item, part or model number, dimensions, number of units and terms of purchase and delivery are a some of the specifics documented on purchase orders. Form and manner of payment and discount information also appear on purchase orders.
When an administrator signs a purchase order, it becomes an offer to purchase and promises payment. Typically, the supplier fulfills the purchase order and sends it on to accounts receivable, which issues an invoice to the originator. As soon as the supplier fulfills it according to its particulars, the originating company pays the supplier according to terms specified on the purchase order. The purchase order, in short, becomes a contract, obligating the supplier to deliver as specified and the originator to pay as specified on the document.
Each participant in the purchase order system must do exactly what is needed to successfully fulfill, bill and receipt a purchase order-initiated transaction. The originator must encode the purchase order, like any message, with language and descriptive terms that are familiar to each recipient. The originator then sends a copy of the purchase order to accounts payable, notifying the department that an invoice may be forthcoming. Copies of the purchase order also notify the supplier’s accounts receivable that an invoice must be generated. The system, be it paper or an e-system, then generates feedback, first in the response of the supplier in sending items specified in the purchase order. Payment to the supplier according to terms defined by the purchase order notifies him that he has fulfilled the terms of the contract.
In a corporate environment, where more than one person maintains records, handles invoicing and payments, and completes tax returns and annual reports, its purchase order system provides a reference for supervisors, accountants and others responsible for company financial functions. In addition to outlining details of purchases, establishing supplier and originator responsibilities, notifying participants how and when to execute their obligations, purchase order systems allow administrators to keep track of expenses and refer to them during budget development. Department heads also review purchase orders to evaluate employee performance and ensure that money is being spent in a manner consistent with corporate policy.