Purchase Order Processing: A Complete Guide

PO processing involves several steps from creating a purchase order to closing it. Learn more about the process and how you can s

 min. read
May 28, 2024
Purchase Order Processing: A Complete Guide

Running a business requires managing multiple processes, and it's easy to get overwhelmed by the sheer complexity of it all. One process that’s often overlooked is purchase order (PO) processing.  However, burying this aspect of business under other priorities can prove costly in the long run. In this post, we will cover the definition and content of a PO, the steps of processing it, the reason for having PO, and finally the differences between manual and automatic PO processing.

PO sample from TemplateLab

Before diving into PO processing, let’s start with what a purchase order is. In the simplest terms, a purchase order is an official document that's used to finalize a transaction between two parties: the buyer and the seller. This document serves as proof that both parties agree on the specifics of the sale, such as item or service description, quantity, cost, payment terms, and more.

Purchase order processing is the process of creating, sending, managing, and closing purchase orders for goods or services. It involves confirming and specifying the actual need for goods or services before issuing a purchase order to a vendor. The PO process is a subset of the broader procurement process that also includes activities such as budgeting, supplier selection, contract management, invoice management, and payment processing.

Every purchase order contains certain details pertaining to the goods or services being purchased and the parties involved. Here's a look at the information you can expect to see in a typical PO.

Specifications and Quantity of the Items Required

A purchase order will specify the exact items that a buyer is purchasing from a seller. This includes details like product descriptions, model numbers, sizes, and colors. It also includes the quantity of each item that is being purchased. For example, a purchase order might read: 10 x Dell Latitude E5450 laptop computers in black color with 8GB RAM and 128GB storage.

Contact Information

The contact information of both the buyer and seller is included in the PO to facilitate communication between parties throughout the procurement process. This enables sellers to reach out to buyers if there is any confusion or query regarding the order. It also ensures that buyers know exactly who they’re dealing with when receiving goods or services from suppliers.

The Price at which Goods or Services are to be Purchased

This section of a purchase order outlines the total cost of goods or services being purchased as well as other additional details like taxes, discounts, and shipping charges. Before signing off on a purchase order, it is important to ensure that all prices and associated expenses are accurately accounted for so as to avoid any financial discrepancies later on.

Order Date

The date on which the PO was issued is clearly indicated in this section. This helps both buyers and sellers keep track of when an order was placed and ensures that delivery timelines can be met without any delay.

Delivery Timelines and Details

This section outlines when goods or services provided by the vendor are expected to reach the buyer’s premises, as well as any specific instructions regarding delivery, such as transportation method, any special packaging requirements, and so on. Delivery timelines should be agreed upon between both parties before signing off on the PO document so that no delays occur during the fulfilment stage of the procurement process.

Payment Terms and Conditions

Payment terms describe when payments are due from buyers for purchases made on POs, such as the number of days within which the invoice has to be paid after delivery. Any special conditions related to payment should also be outlined here, along with payment methods accepted by the seller, such as credit card or bank transfer.

Purchase Order Number

Each PO needs a unique identifier known as a purchase order number (PON) that can be used by both buyers and sellers while communicating about respective orders over the phone or email. This unique number helps companies keep accurate track of their orders and facilitates efficient resolution of any conflicts related thereto if they arise at any point during the procurement process.

Purchase orders play an important role in the procurement process. Here are some of the benefits of using these documents.

A PO Helps Clear any Misunderstandings

Purchase orders clarify purchase details, ensuring there are no misunderstandings between buyers and sellers. They provide detailed information about what is being purchased, including product descriptions, quantities, delivery dates, and payment terms. This helps ensure that both parties are on the same page before any transaction occurs.

POs Help Prevents Fraud

Purchase orders require both parties to agree on all details before any money changes hands. This makes it more difficult for fraudsters to take advantage of unsuspecting buyers or sellers by providing false information or goods that do not meet expectations.

POs Facilitate Faster Invoice Approvals

By having all relevant information in one document, invoices can be approved faster, and any discrepancies can be easily identified and rectified. This helps to ensure that payments are made on time and that there are no delays in fulfilling orders.

POs Help With Budgeting and Planning Ahead

For buyers, having a purchase order in place can help with budgeting as it provides an accurate estimate of how much money needs to be spent on each item or service being purchased. This allows them to plan ahead more effectively so they can avoid overspending or running out of funds unexpectedly.

Creating a purchase order involves several steps that must be followed in order to ensure that the goods and services are delivered as expected. The following is an overview of the process of creating a purchase order:

Step 1: Purchase Requisition

The first step in creating a purchase order is to create a purchase requisition. This document outlines the items or services that need to be purchased, as well as any special requirements or specifications for those items or services.

Step 2: Creation of Purchase Order

Once the requisition has been created, it’s time to create the actual purchase order. This document should include all relevant information about the items or services being purchased, such as quantity, price, delivery date, and payment terms.

Step 3: Confirmation of Purchase Order

After the purchase order has been created, it must be approved by both parties before it can be finalized. The seller will review the details of the purchase order and either accept or reject it based on their own criteria.

Step 4: Recording and Filing

Once the purchase order has been accepted by both parties, it should be recorded and filed for future reference. This ensures that all necessary information is available if there are any disputes later on down the line.

Step 5: Dispatch and Delivery

After recording and filing the purchase order, it’s time to dispatch and deliver the goods or services outlined in it. Depending on what was purchased, this may involve shipping them directly to the buyer or arranging for pickup at a designated location.

Step 6: Closure

Once all of these steps have been completed successfully, it’s time to close out the process by ensuring that payment has been made according to agreed-upon terms and conditions. This final step ensures that everyone involved in creating and fulfilling the purchase order gets paid appropriately for their work.

There are two main approaches to the PO process, manual and automated. The manual process entails manually entering all data into a system and verifying the data for accuracy. This is a time-consuming and error-prone process. The cost of manually processing a PO can range from $59 to $741 according to a study conducted by CAPS Research. Cost of PO processing can then accumulate to a staggering amount.

An Intelligent Document Processing like FormX uses AI technologies like optical character recognition and machine learning to automatically extract the desired information from purchase orders and other documents, such as invoice, receipts, IDs, etc., and return structured data for further processing. Users can easily build their own no-code extractors. All you have to do is upload enough number of samples, label the desired fields of extraction, verify the accuracy, and then integrate the extractor with other software via API. This eliminates manual entry errors and streamlines the entire process, resulting in faster delivery times, fewer disputes between buyers and suppliers, and lower costs. With the help of FormX, you can significantly reduce the time it takes to complete the processing of purchase order and ensure that your business is running as efficiently as possible.

Purchase order processing is an integral part of any business as it ensures that orders are fulfilled on time and accurately. By mastering this process, you can ensure that your procurement process is running efficiently. With revolutionary automated solutions like FormX, you can make the entire process much faster and more accurate. Get in touch with us today to schedule a demo and see how FormX can help you streamline various document-centric processes.