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Vendor

Purchase Order-Purchase to Payment Cycle

by Sanjeev Archak Sanjeev Archak No Comments

A purchase order is a document sent from a purchaser to a vendor to confirm a specific purchase of goods or services. One little document can go a long way in clearing up the logistical confusion of a growing business. A purchase order is an important part of the purchase to payment cycle.

What is a purchase order?

A purchase order is raised by a buyer to a vendor. A purchase order denotes what exactly the buyer requires, terms of the delivery, quantities and prices of products or services. Often a purchase order is initiated by the purchase manager in an organization. Further, the purchase order or P.O. as it is called, goes through multiple levels of approval within the organization. Post approvals it is sent to the vendor. Needless to say, quotations have to be obtained from vendors before a P.O. can be raised.

Zoho Books allows the users to configure multi-level approvals for a purchase order with e-mails or in app notifications sent to all stakeholders.

Why use Purchase Orders?

1.They make life easier:

A purchase order is a document which puts down in writing the deliverables of a vendor. It is the best way to avoid miscommunication and time consuming back and forth with vendors. Further, all the internal stakeholders in the business are aware of what is purchased and can plan the business ahead.

2.Provides audit trail:

Purchase orders remove a lot of stress from the auditing process by providing auditors with a conclusive audit trail and an easy way to cross-check invoices and packing slips. Without purchase orders, prepare for a long, painful process of poring over invoices, receipts and emails with vendors.

3.Purchase Order is a legal document:

Once a vendor acknowledges a P.O. as accepted by him, it creates a mutually binding contract between the buyer and the seller. The seller is bound to deliver as per the terms agreed.

4.Tracking Orders becomes easy:

A purchase order makes it easy to track the goods and services coming into a business. It is essential for a business to track when shipments are arriving, how to pay for them etc., a concept like “Just in Time” will work only if production planning works in sync with purchase and receiving functions.

What should the Purchase Order Contain?

Here is list of items a P.O. must contain:

  1. P.O. Number
  2. P.O. Date
  3. Vendor name and billing address
  4. Buyer name and shipping address
  5. Additional contact information
  6. Delivery date
  7. Shipping method
  8. Shipping terms
  9. Item name
  10. Item description and technical information
  11. Item quantity
  12. Item unit cost
  13. Line total
  14. Taxes
  15. Total price
  16. Payment terms

What happens to a P.O. goods or services are delivered?

Upon the delivery of the goods, a goods received note (GRN) is generated detailing the items received. This GRN is compared with the P.O. to check if the ordered goods have been received. If the GRN is in agreement with the P.O. it is forwarded to the accounting department and the P.O. is “closed” The accounting folks do a three way match between:

  1. Purchase Oder
  2. Goods Received Note
  3. Vendor Invoice

If all three are in agreement, then the vendor is paid. This completes the “purchase to payment cycle”.

When not to raise a Purchase order?  

Certain regular, recurring purchases relating to the day-to-day operations of a business including rent, electricity, internet are usually billed for the month and do not require a purchase order.

We hope in this post we have able to address the basics of the Purchase to Payment cycle.