Buying on credit: purchase orders explained

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Many businesses will be familiar with a purchase order. They are documents sent from the purchaser to the supplier requesting goods or services. The purchase orders, when accepted by the vendor, form a legal contract between the buyer and the seller, and serve as a form of security for the supplier.

Typically, purchase orders will provide detail of the items the buyer agrees to purchase and the agreed unit price. They also outline delivery dates and terms of payment for the buyer.

Four types of purchase order

Standard Purchase Orders (SPO) are the simplest and most commonly used purchase order, typically created for one-off or infrequent purchases.

SPOs are generated when you know the basics, such as the stock item or goods, cost per unit and the delivery schedule. Payment terms such as cash on delivery, within seven days, or a set date the following month, are also known.

Planned Purchase Orders (PPO) are long-term agreements where the buyer commits to purchase goods or services from a single source. With PPOs, the inventory item, price and payment terms are known, however, the requisite delivery schedule is undetermined.

For planned purchase orders, the supplier will control the exact shipment date of goods to the buyer. Prerequisite dates may be supplied, however the supplier will treat these as tentative dates. The Supplier’s Schedule Release against the PPO will inform exact shipment dates.

Blanket Purchase Orders (BPO) are commonly set up for frequently purchased materials and supplies. The BPO or Standing Purchase Order is valid for a set period of time with a capped dollar spend.

A BPO is generated for repetitive, low cost purchases with frequent delivery dates. Large orders with significant discounts are pre-negotiated, delivered as required and sometimes require payment on receipt.

The information contained on a BPO will include the time period to be covered, the purchase items to be covered, maximum quantities, any agreed pricing and the terms of payment.

Contract Purchase Agreements (CPA) are created with a supplier to agree on specific terms and conditions of supply, without indicating the actual goods and services you will be purchasing. In other words, they are used when the buyer doesn’t know the item that will be purchased.

The information provided in a CPA is the supplier name, supplier location, terms of payment and any additional agreement details. Once a CPA is in place, SPOs are created, referencing the CPA when something is to be purchased against it.

Business benefits

A good purchase order system allows you to plan for expenses and budget for the costs of doing business. Purchase orders provide a means of checking what is received against what was ordered, helping to resolve any disputes that may occur and to eliminate duplication.

Technology has enabled the purchasing process to become more efficient and allow for better inventory and payment tracking. Real-time inventory management systems provide transparency and facilitate more effective business planning.

Purchase order computer systems provide a way for businesses to maintain accurate information. Automated record keeping saves time, helps improve budget control and reduces costs.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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