For new business owners, getting your head around the array of business terms and jargon can be difficult. Two often confused terms you may have come across are purchase order and purchase requisition. While these terms are often used interchangeably, this is mistaken as there are distinct purposes for each.
In this article, we outline what purchase orders and purchase requisitions are and the key differences between them. Lastly, we outline why knowing the difference between the two is key to the effectiveness and efficiency of every business.
What is a purchase order?
A purchase order is simply a statement sent to a vendor when the company wants to purchase the vendors goods. It is a document that provides all the necessary information for the vendor including:
- Goods requested and quantity
- Buyer and vendor information
- Delivery address, price, invoice details and any other terms of payment
Each purchase order always has an accompanying number which is used for identification purposes when it’s time for invoicing.
This will be sent to the vendor and if all terms and requests are accepted by the vendor, the buyer will be sent an invoice for the goods and the process of order fulfilment will begin.
What is a purchase requisition?
Often confused with purchase orders, a purchase requisition is in fact much different. A purchase requisition is essentially a request from one department to another (usually the finance department) for approval of costs.
A purchase requisition will have information like:
- The buyer’s department
- The vendor’s name and information
- A description and quantity of the goods required and the price
This purchase requisition is sent to the finance department, or whichever department approves the costs, depending on the business or organisation. The recipient department will either approve or reject the purchase requisition. If approved, the department who sent the purchase requisition then has formal permission to send the vendor purchase order, at which point the process described above will begin.
So, what is the difference?
It may be useful to think about a purchase requisition as simply an interdepartmental ‘tick-box’ for approval to create a purchase order. In fact, a purchase requisition is not an order at all at that stage, but simply a request for approval to make a purchase order. The purchase order itself is the document created to place the order, once the purchase requisition has been officially approved.
It is vital that business owners understand the ins-and-outs of both purchase orders and purchase requisitions. As a business grows, understanding and implementing processes like these can become key to the effectiveness and efficiency of the business, and can help reduce errors when it comes to invoice time and balancing accounts. Business managers should ensure anyone in the company who may make orders with vendors understands the difference between both and uses them correctly.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. When not writing about inventory management, you can find her eating her way through Auckland.