The Importance of Purchase Orders

For those of us that watch/analyze/critique the procurement world on a regular basis, it is easy to get caught up in the freshest, trendiest developments.

And, frankly, there are plenty of such trends in this ever-evolving world to keep us busy.

But in the rush to discuss to discuss the newest issues, we often forget about the topics that make up the foundation of procurement. And, in the procurement realm, purchase orders are as important as it gets.

So…first things first: what is a purchase order?

From businessdictionary.com: A purchase order is “a buyer-generated document that authorizes a purchase transaction. When accepted by the seller, it becomes a contract binding on both parties”.

A purchase order sets forth the descriptions, quantities, prices, discounts, payment terms, date of performance or shipment, other associated terms and conditions, and identifies a specific seller.

A binding contract

The issue at the heart the importance of purchase orders is that they form a legally binding contract when “accepted by the seller.” Why is this important? Simply put, it gives the purchasing organization an increased level of control over the purchases it makes.

For instance, if a product is delivered in unsatisfactory condition or, in some cases, not delivered at all, the purchasing organization has a clear record of what was expected. Remember – a purchase order sets out a well-defined set of terms including “performance of shipment,” which should include a standard of quality.

Budgeting and forecasting

The importance of purchase orders, however, doesn’t end in the “legal” realm. Clean, clear and organized (organized!) purchase orders are key for budgeting and forecasting. An easily accessible collection of all purchase orders will give management or executives a better understanding of how much the company is spending, and on what.

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How can e-procurement help?

If using purchase orders helps an organization understand its purchasing better, than using e-procurement takes that understanding and pushes it into overdrive. For example, instead of referencing paper-based purchase orders at regular intervals, e-procurement generates electronic purchase orders that users of the system can access anytime, anywhere. This real-time visibility into company spending is powerful – it allows a business to keep up to date on its spending and, if necessary, make changes along the way. Management and executives still have the ability to forecast and budget for the future with an e-procurement system, but they are also able to change up spending on dime, if need be.

Real-time data and analytics on spending is a option that companies, of all sizes, should enjoy. But, of course, it all starts with the foundation of procurement: the purchase order. Without those critical documents, procurement/purchasing can go off rails, quick.

That’s the importance of purchase orders.