A purchase order is a commitment to buy, a legal document given from a buyer to a seller. The purchase order process begins with the assignation of a unique number and document which lays out all aspects of the buying process. A purchase order’s terms of agreement may include freight, delivery date, cost, merchandise description, payment expectations and many others.
Large or small, manufacturers who wish to limit the amount of inventory stocked on a warehouse floor will wait for a purchase order from a customer in order to begin filling an order. The purchase order process starts with a document from the buyer to the seller which outlines expectations of the product as well as delivery terms. The manufacturer then typically issues a sales order, which is an acknowledgment of those expectations. If the purchase order and sales order are matches, this limits the liability of both parties as the purchase order is a legally-binding contract to buy.
After the sales order is generated, the manufacturer can begin work on the order. This may include the purchasing of materials, the hiring of labor and the modification of equipment. The purchase order process protects the manufacturer in case the buyer decides to back out of the sale after expenses have been incurred by the seller. The buyer is also protected by this process because it is not obligated to accept or pay for merchandise that does not meet the expectations outlined in the document.
The purchase order process also helps to streamline ordering by listing all or most of the variables involved in the ordering process. These include merchandise description, the expected date, exact cost, payment terms, and even which party is obligated to pay the freight cost. This process is particularly invaluable when importing or exporting, as many of the terms have become universal in meaning and easily identifiable by other countries.
Many manufacturers use purchase orders to plan cash flow budgets months, or even years, in advance. The cycle from the date a purchase order is issued until the time delivery is made and payment is received might be quite long. A business must plan its expenditures accordingly in order to be able to make short-term cash requirements, like payroll.
After the purchase order is issued and the sales order is acknowledged, the work begins. The process ends with the delivery of goods and the issuance of an invoice, though some manufacturers require all or partial payment before delivery. Once the merchandise is accepted and the invoice is paid, the purchase order process is complete.