Purchase order

A purchase order (PO) is a commercial document and first official offer issued by a buyer to a seller indicating types, quantities, and agreed prices for products or services. It is used to control the purchasing of products and services from external suppliers.[1] Purchase orders can be an essential part of enterprise resource planning system orders.

Not to be confused with Compulsory Purchase Order.
An example of a purchase order request from a travel agent.

Indent is a purchase order often placed through an agent (indent agent) under specified conditions of sale.[2]

The issue of a purchase order does not itself form a contract. If no prior contract exists, then it is the acceptance of the order by the seller that forms a contract between the buyer and seller.

Overview

Companies use purchase orders for several reasons. Purchase orders allow buyers to clearly and explicitly communicate their intentions to sellers. They may also help a purchasing agent to manage incoming orders and pending orders. Sellers are also protected by POs in case of a buyer's refusal to pay for goods or services.[3]

Purchase orders provide benefits in that they streamline the purchasing process to a standard procedure. Commercial lenders or financial institutions may provide financial assistance on the basis of purchase orders.[3] There are various trade finance facilities that almost every financial institution allows business people to use against purchase orders such as:

  1. Before shipment credit facility
  2. Post shipment credit facility
  3. Trade finance facility
  4. Foreign bill purchase credit facility
  5. Bill retirement credit facility
  6. Order confirmation
  7. Followup

The purpose of purchase orders is to procure materials for direct consumption or for stock, procure services, cover customer requirements using external resources, or procure a material that is needed in plants from an internal source (long-distance intra-plant stock transfers). They may also place once-only procurement transactions and optimize purchasing by taking full advantage of negotiated conditions or for optimal utilisation of existing transport capacities.[3]

Creating a purchase order is typically the first step of the purchase to pay process in an ERP system. Purchase orders may require a SKU code.

Although a typical purchase order may not contain contract language (in fact most contain little more than a list of the goods or services the buyer desires to purchase, along with price, payment terms, and shipping instructions), the purchase order is a specially regarded instrument regulated by the Uniform Commercial Code or other similar law which establishes a purchase order as a contract by its nature. Yet despite the nature of the purchase order as a contract, it is common to accompany the acceptance of a purchase order with a legal document such as the terms and conditions of sale, which establish specific or additional legal conditions of the contract.[4]

The US Federal Acquisition Regulation states that purchase orders should generally be issued on a fixed-price basis, but provision is also made for unpriced purchase orders to be issued where "it is impractical to obtain pricing in advance of issuance of the purchase order".[5]

Formats

Electronic purchase orders

Many purchase orders are no longer paper-based, but rather transmitted electronically over the Internet. It is common for electronic purchase orders to be used to buy goods or services of any type online.

There are many names for Electronic Purchase Orders. It is sometimes known as: E-Procurement, E-Purchasing, E-Purchase Requisition. These terms are normally all referring to Electronic Purchase Orders.

Non-electronic purchase orders

The record of purchase order in most business firms are still on paper and thus there is a need for proper purchase order format. Many users wish to have professional formatting for purchase orders for several reasons. A company may wish to have a strong understanding of purchase transactions or to know the basic requirements of purchase order. It may also make it part of business documentation, which makes the process easier while keeping record of all transactions and to have good impression on the client or customer.[6]

Purchase order request

A purchase order request or purchase requisition is a request sent internally within a company to obtain purchased goods and services, including stock. The request is a document which tells the purchasing department or manager exactly what items and services are requested, the quantity, source and associated costs.

A Purchase Requisition Form (PRF) is filled out prior to purchasing goods as a form of tangible authorisation. Purchase request forms are often used in smaller business who do not have a computer-based system. However, many computer (included web-based solution) systems are available on the market that can facilitate the capture of purchase request information. Purchase order requests can also be passed to the purchasing department via a management information system.

A PRF may contain budget and purchase values to make the individual aware of the annual and remaining budget before a purchase is made. Such a system is there to guarantee that goods and services are purchased with the consent of the line manager and that a sufficient budget is available.

See also

References
  1. Dobler, Donald W; Burt, David N (1996). Purchasing and Supply Management, Text and Cases (Sixth ed.). Singapore: McGraw-Hill. p. 70.
  2. "Indent". businessdictionary.com. Retrieved 7 August 2019.
  3. "Purchase Order Benefits". Loyola University New Orleans. Retrieved 29 August 2016.
  4. "Requisition Order and Purchase Order". DPO. Retrieved 29 August 2016.
  5. FAR - Subpart 13.3—Simplified Acquisition Methods, accessed 15 November 2016
  6. "Purchase Order Templates". Smartsheet.
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