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A purchase order, commonly abbreviated to PO, is a legally binding document that confirms a business’s intent to buy goods or services from a supplier.
It details the full list of items being purchased including quantities, payment terms and agreed delivery dates.
There are multiple reasons to issue a PO. For one, it helps you get on top of cashflow management as you know how much money will be leaving your account in a given period, so you can plan and budget accordingly.
It’s important to understand the PO meaning, since many businesses use them to create a paper trail for their bookkeeping records.
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A PO, or purchase order, is a legal document issued from a buyer to a vendor or supplier, to confirm that payment will be made for goods at a later date.
A purchase order should contain the amount of money due to be paid to the seller. It should also show the method of payment and a concrete date for the agreed-upon payment.
A purchase order can be useful for creating good long-term relationships with suppliers, as having a clear expectation for the order minimizes the risk of dispute on both ends.
For example, if you run an organic fashion company and have to source your textiles from a factory in India, you can issue a purchase order to the overseas supplier. The supplier will see exactly which textiles you require, and accept if they have the necessary inventory to fulfill it.
You can also set up recurring purchases with a standing purchase order. This is useful if you need to order a set amount of the same textiles every six months. A recurring purchase order uses the same PO number, so the supplier can easily identify your PO each time.
Read on to find out: |
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The formal purchase order document can help business owners with bookkeeping efforts, but it’s an often misunderstood concept.
So what purpose does a purchase order serve?
A purchase order is considered a legal contract between the buyer and seller. It is important to note that a PO is only legally binding once it has been approved by the vendor or supplier. This is to protect against cases where the supplier may not have the goods requested.
By issuing a PO, you’re agreeing to pay for the goods described at a future date once confirmed by the supplier. This helps your business foresee what accounts payables to prepare for. It also helps you better manage inventory if your business is goods-based.
If your business has a dedicated purchasing or procurement team, then purchase orders can form part of a robust purchase approval process.
If there is a need for goods or supplies within the company, a request is sent to the procurement team, the team can approve or reject the order based on budget and supporting documents. If the order is approved, the PO is prepared and sent to the supplier.
Once the goods are received and the invoice comes in, the PO can also be used to check that the invoice matches the agreed order. This way, when you balance your books you can check that they’re 100% accurate.
To make a purchase order, you’ll have to go through the following steps:
There are several important pieces of information to include on a PO, which are as follows:
Purchase orders can help business owners, but they can also be a burden.
Pros:
Cons:
Purchase orders can help you overcome and avoid various issues in the day-to-day operations of your business.
Here are some of the main issues you can prevent by creating and using purchase orders:
✈️ Paying for international orders? You can get a better deal by using Wise Business. Get the real, mid-market rate when you use Wise, and pay suppliers in their local currency. |
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An invoice is as important to a business as a purchase order, if not more.
The invoice provides an itemized list of goods or services supplied and serves as an official request for payment.
The purchase order provides an itemized list of goods or services due to be purchased.
So while the seller issues invoices to buyers, buyers can issue purchase orders stating intent to buy a certain quantity of goods. In terms of a timescale, the purchase order is only ever issued before an order is fulfilled. The invoice is typically issued afterward upon completion of the sale.
You can read more about the differences in the full guide to purchase orders vs invoices. |
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Now that you’re clear on the purchase order meaning, you’ll have a grasp of why they can play an important role in the purchasing process.
You can set expectations with purchase orders. This is especially useful when dealing with overseas suppliers.
An honest error can prove disastrous with overseas suppliers, as it can mean having to re-order. This adds time onto shipping, causes extra costs, and can leave customers waiting. Using a purchase order mitigates this risk.
Save time & effort by using Wise
When the time comes to pay overseas suppliers, Wise Business is here to save you time and money. You can pay international invoices with ease, for up to 19x cheaper than PayPal.
If you already do business on an international scale, you’ll understand how slow and frustrating paying suppliers can be. Wise can provide a stress-free solution to pay international bills, employees and subscriptions. All from the same place.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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