by martieLast Updated : Apr-17-2023
Is it your first time creating a purchase order? Are you looking to learn how to create a purchase order to help your accounts payable team?
You need a purchase order process if you are a growing business struggling with cash flow visibility and other financial statements. A purchase order process helps you control costs and accurately predicts working capital needs. In other words, how much cash do you need and when so that you can keep running your business and gain better inventory management?
But many companies don’t understand the importance of the purchase order as an official document because they purchase everything on a credit card. Since they get 1.5% cash back, the argument is that why go through a purchase order process? The reality is that you can use a purchase order process along with credit cards. Many company owners don’t understand that purchase orders are a mechanism to control costs and that credit cards are just a payment method.
But if you’re new to the purchasing process, you may wonder where to start. In this blog post, we’ll look at the steps involved in creating a purchase order for any digital purchase and offer tips for making the process as smooth and efficient as possible.
A purchase order is a legally binding document that a buyer issues to the supplier confirming the intent to purchase a product or service.
The seller then accepts the purchase order and provides an order acknowledgment. This is the purchase order confirmation that the vendor has received the purchase order and can provide the required product or service as per the terms and conditions of the purchase order. This is called Acceptance. A purchase order is not legally binding until the vendor provides an acceptance.
Some contracts have an auto-acceptance clause stating that the purchase order is automatically accepted if the supplier doesn’t respond in a fixed number of days.
If the product is not readily available, the vendor might provide a future date for the delivery. In the case of a service, if the vendor doesn’t agree with the specifications, there might be a back-and-forth.
Here is an example of a purchase order:
The purchase order header is the top section of the purchase order listing the purchase order number and the date the purchase order was issued. It generally includes the logo and name of the company issuing the order.
Vendor and shipping details include information about the vendor and where the order needs to be shipped.
The vendor details include the following:
The Ship to location details includes things like:
Additionally, companies also include information for sending the Bill. For example, only send the bill by email and so on.
The other term section includes information like payment terms, delivery contact information, etc.
Line item details are the core of the purchase request. This section lists what items are being purchased, the quantity of the purchase, the unit price, and the required date or requested delivery date.
This section summarizes the information on the purchase order, for example – the total amount of the purchase order, any additional taxes information, and so on.
Some companies prefer that an authorized signatory must sign each purchase order. Unless you are using a manual purchase order process, printing the authorized signatures on each purchase order is pretty straightforward.
If you are using a manual purchase order process, then each order must be signed by an authorized signatory.
The terms and conditions refer to all the key terms the vendor must accept to accept the purchase order. This generally includes your code of conduct, legal terms, and delivery and commercial terms.
If the vendor doesn’t agree with the terms, then a back-and-forth is required to negotiate the terms. Most companies have contracts that dictate the terms of the purchase.
Now you know all the critical parts of a purchase order, let’s get into how to create a purchase order.
There are primarily two ways of creating a purchase order.
Option 1: Manual Purchase Order Process
As the name suggests, in a manual approach – the purchase order is created using a paper form, a Word or spreadsheet template, or some other ways like PDF, etc.
The main issue with the manual purchase order process is that it takes too long to create a purchase order. That might be fine when you are just getting started and have limited volume, but as the purchase order volume grows, this approach doesn’t work.
We typically see that once the volume crosses 10 purchase orders a month, you need an automated process to create purchase orders.
Option 2: Automated Process With A Purchase Order System
A purchase order system allows you to automate the purchasing process without creating manual orders.
It speeds up the process and helps with compliance because all the purchase order approvals are captured in one place for auditors.
You can easily control the workflows based on the purchase amount so that the appropriate person in the company approves the purchase.
In the next section, we will discuss how to use a manual and automated purchase order process, but let’s first see what is involved in creating a purchase order.
Every company follows a typical process to create a purchase order. Please note that not everyone follows the seven-step process. You can vary this process as per your needs.
A manual purchase order process generally involves the following steps:
A purchase order system automates the purchasing process by enabling the request for purchase and approval process. ProcureDesk is our product, and we have designed this specifically to automate the purchase order process. The below process for purchasing automation uses ProcureDesk but can replace with any other purchasing system.
Here is a step-by-step process for using a purchase order system to create a purchase order:
A purchase order request is the first step toward the purchase of the product or service.
The biggest benefit of a purchasing system is that it allows you to easily create purchase order requests from catalogs, speeding up the purchasing process.
Let’s say Sally wants to purchase office supplies from Amazon.com. She can login to ProcureDesk and click on the supplier logo to start the process.
She can then pick up the supplies she needs to purchase, but instead of placing the order, the system routes her back to ProcureDesk.
Here is an example of how it looks on Amazon.com:
Once Sally clicks on “Submit these items for approval,” the data for the cart is transferred to Sally’s shopping cart in ProcureDesk.
Here is an example of how it looks in the purchase order software:
You can also add the items from an internal catalog or enter the description directly into the system.
The next step is to review the budgets and ensure there is enough budget available for the purchase.
If you are using a manual purchase order process, the employee needs to check with the finance team before purchasing.
With ProcureDesk, the budget check is done automatically.
The administrator can define the budget in advance and assign access. The system then automatically shows the available budgets to the employee.
Once the employee selects the appropriate budget, the system checks for available funds and whether enough is available to purchase.
Finance teams can add additional controls to support the budget process. For example – In case of no budget, trigger an additional approval workflow.
Alternatively, you can block the purchase and let the user contact finance to change the budget amount.
Here is an example of how the budget check works in ProcureDesk:
Are you concerned that the purchase might not be approved at the appropriate purchase authority level?
With ProcureDesk, you don’t have to worry about this.
An administrator can set up approval limits for different types of users. The system then uses the pre-defined approval workflow to route the request for further approval.
For example, send the request to a manager for approval, and if it is more than $5,000, send it to the VP of finance for review and approval.
Here is an example of a system-generated workflow:
The system sends a notification to the approver, letting them know that a request needs to be approved.
The approver has multiple options to approve the request:
There are multiple ways to approve the request, and the approver can choose the most convenient method.
Here is an example of how the approver can request the purchase from the phone:
The system also sends daily reminders to the approver for pending requests in the approver’s queue.
The system automatically generates the purchase order and sends it to the supplier. There are multiple templates to modify the purchase order template to suit your unique needs.
Here is an example of a purchase order:
The purchase order is sent to the vendor in one of the following ways:
The best part is that you don’t have to generate and send the purchase order to the vendor manually.
The last step in the purchase order creation process is for the vendor to acknowledge the receipt of the purchase order.
There are different ways for the vendor to acknowledge receipt:
Whatever method you choose, ProcureDesk allows you to specify the instructions on the purchase order.
Here is an example of the vendor acknowledgment that is created in the system:
A purchase order could of different types, but here are some of the common types of purchase orders:
A standard purchase order is the most common one issued to a vendor. The standard purchase order is commonly used for purchasing materials. For example, office supplies, IT supplies, and so on.
A standard purchase order has a quantity, unit price, description of what is being purchased, and added taxes and shipping costs.
Here is an example of a standard purchase order:
A blanket purchase order is issued when the purchase schedule is not established. For example, you want to engage a marketing consultant to optimize your website.
The consultant provides you with various options to optimize your site, but you decide to engage them on a contract basis, where you will engage them as needed on specific projects.
At this time, you probably know the per-hour rate the contractor will charge and the overall Spend you might have. But since the timing is unknown, you can create a blanket order.
A blanket order allows you to get approval at one time, and then the consultant can invoice as and when they perform a service. Until money is available, you can keep using the purchase order.
Here is an example of a blanket purchase order:
A contract purchase order is when you purchase based on an agreement you’ve already negotiated with the supplier.
This agreement covers your price when the items or services are delivered and any other important details during a purchase transaction. It’s useful for long-term or recurring purchases because it gives you and the supplier a sense of stability and consistency.
Basically, it’s a way to simplify the purchasing process, save time and money, and build a stronger relationship with your supplier by setting clear expectations and responsibilities for everyone involved.
A service purchase order is used for purchasing services. Let’s use an example of purchasing services for facility management, helping in any purchase order agreements.
Now, when it comes to determining the quantity and unit price, here’s an example to help you out:
Here is an example of the service purchase order.
So, who exactly prepares a purchase order? Well, it’s typically the buyer or the purchasing department of a company or organization responsible for creating a purchase order.
Usually, the person or team who creates the purchase order is familiar with the purchasing process and knows the company’s needs and budget. They might even be responsible for getting quotes from different suppliers, negotiating prices, and ensuring the purchase follows the company’s procurement policies and procedures.
Sometimes, a purchase order might be initiated by someone else in the company, like a department manager or project lead, and then sent to the purchasing department to be processed. But ultimately, the purchasing department or individual who initiates the request is responsible for ensuring the purchase order is accurate and complete.
Organizations often conduct studies to determine the average cost of processing a purchase order, which can vary widely from $50 to $1000, depending on the study. Let’s look at some benchmarks to get a better idea of what these costs look like.
After reviewing these benchmarks, many procurement leaders come to one of two conclusions. The first is that there is a strong business case for reducing the cost of a purchase order. For example, if it costs $500 to process each purchase order and you process 10,000 orders per year, a 10% reduction in cost would result in annual savings of $50 per order, or $500,000 in total.
The other observation is that these cost benchmarks may not apply to every industry or company, and their costs may not be as high as the benchmarks suggest.
If you’re running a small business and need to purchase goods or services, issuing a purchase order can help ensure everything goes smoothly. Here are the basic steps you’ll need to follow:
Creating a purchase order may sound like a pain, but it’s crucial to managing your business’s procurement activities. Lucky for you, ProcureDesk has made the process easy with its procurement automation tool.
With ProcureDesk, you can customize purchase orders to fit your business needs and workflows. Plus, the user-friendly interface makes it a breeze for anyone to create and manage purchase orders without extensive training.
The best part? ProcureDesk can save you time and money by automating the approval workflow, eliminating the need for manual routing. Plus, it integrates with your accounting software system, giving you real-time visibility into your spending.
If you’re ready to streamline your purchasing process and improve efficiency, ProcureDesk is your tool. Don’t believe us? Schedule a demo with their team and see how purchasing automation can transform your procurement process. Say goodbye to tedious paperwork and hello to a more efficient and cost-effective procurement process!
What you should do now
Whenever you’re ready… here are 4 ways we can help you scale your purchasing and Accounts payable process.