How to Create Purchase Order?
Many business don’t use the Purchase Orders to inform their Vendors. They typically call their vendors and inform them on what they need and how much they need. These phone calls could lead to confusion on what is required, when is required, which Unit of measurements and what Quantity required etc?
So let’s explain on how to create a new Purchase Order and how it can be useful for Business to grow?
What is Purchase Order?
Purchase Order is a document that informs the Vendors on the following details.
- List of items to purchase and when it should be delivered?
- How much and in which units of measurements (KG / Pcs / No /Meter) etc?
- What is the agreed Purchase price per unit of measurements?
- Where the materials to be delivered?
- What are the terms and conditions for the purchase of items?
Purchase orders are always important document that helps the sellers to protect himself, in case Buyer declines to accept the materials or decides not to pay the money.
By looking at the above list, now you must be convinced on why you need a Purchase Order for the business to function smoothly.
A large Organisation follow the below process.
Below we have mentioned the process that’s followed to create a Purchase Order.
- Raise a Purchase Indents – These are raised by the Planning and Production Departments, Admin or Stores department depending on which items are on shortage or what is to be procured based on the Forecast or based on production plans. (AcTouch.com has built an Integrated Indents and Purchase system that helps Manufacturing companies)
- Purchase Indents are approved by respective Department heads
- Now these approved Indents are used by Purchase department to raise the Purchase Orders to the respective Vendors with timelines to deliver. Purchase Dept will negotiate the Unit Price and is accepted by both the parties.
- This PO is approved and sent to the vendor to send the materials.
- Vendor would call the Customer, in case he needs any clarifications.
- If everything is OK, vendor will send the materials to customer either with a Delivery Challan or Invoice.
- Stores person will receive the materials against the approved PO.
How Purchase Order helps?
1. How Purchase Order helps Stores Department?
When the materials comes to factory or company Godown, the Stores Department in-charge is responsible to collect the material. Now he needs a reference on what to receive, how much to receive etc. Approved Purchase Order solves this problem, because Stores Person has a documental evidence on what to receive and how much to receive.
In case the materials are not as per the TERMS and CONDITIONs, he can reject and send the materials back to the vendor without in-warding them.
2. Protects Employees from taking more items than what’s ordered.
Many times, vendors will try to send more materials than what’s ordered. This is called “DUMPING”. This creates problems for Customer as he doesn’t need this product more than what’s needed or he doesnt have the capacity to store them or his cash flow is affected due to this.
Its good to have an approved PO.
3. Documental evidence for both Customer and Vendor
When an order is placed, the Customer would have given a clear specification about the materials required, its hardening values, its color etc. If a vendor sends the wrong specification, it protects the customer and vice versa too.
4. Helps in cashflow management and ensures we buy what’s needed – Finance Department can forecast their outflow.
Cashflow is an important aspect of a business and it depends on what materials bought and when the payment is due for the vendor. Most of the cases, the vendor gives a credit period to purchased items. But having a documental evidence helps Finance department with when to pay and how much to pay etc.