What is Purchase Order? All information about Purchase Order

Currently, Purchase Order has become a popular term, mentioned by many businesses in the process of buying and selling products and services. So what is a Purchase Order ? What is the effective process of using Purchase Order in business? In the article below, let's learn with 1C Vietnam to know the above detailed information.

1. What is Purchase Order?

Purchase Order (PO) is a commercial document sent by a buyer to a supplier authorizing the purchase of goods or services. Simply put, a PO is a legally binding contract, valid as a sales agreement between two parties.

2. Meaning of Purchase Order

Purchase Order is an important document in the purchase and sale of goods and services. This document benefits both buyers and suppliers, helping the buying and selling process go more smoothly and effectively. Specifically:

2.1. For buyers

The use of PO in goods/service procurement activities is very important for buyers. By using Purchase Order effectively, buyers can ensure that orders are fulfilled as specifically agreed upon:

• Avoid future misunderstandings or legal disputes, helping to ensure that both the buyer and seller clearly understand the terms of the Purchase Order.
• Purchase Order provides clear information about orders, helping buyers track and manage activities more accurately and effectively.
• Specific data on price, quantity, delivery time, etc. are clearly stated in the PO, helping buyers easily compare and choose the most suitable supplier.
• By comparing the PO and actual results, the buyer can determine whether the seller has met the set requirements or not.

2.2. For sellers

During the trading process, PO is not only important to the buyer, but is also an extremely necessary legal document for the seller. This is necessary evidence, proving that the sale transaction was carried out with clear terms. Details of benefits for sellers:

• Helps the seller be protected if the buyer does not pay or receive the goods.
• Orders help sellers strengthen relationships with customers, demonstrating the professionalism and reputation of the business.

3. Basic content of Purchase Order

Purchase Order is a legally binding document, used to confirm the purchase of goods or services between a buyer and a supplier. When signed, the Purchase Order will become a legally enforceable contract, binding the responsibilities of both parties to the agreed terms. Typically, detailed information about a Purchase Order includes the following main components:

• Quantity of goods: Quantity of goods ordered by the buyer.
• Unit price: Price of one unit of goods.
• Delivery conditions: Regulations on location, time and method of delivery.
• Packaging: Regulations on type of packaging, quantity of packaging and method of packaging goods.
• Payment method: Regulations on time, form and method of payment.
• Term: The seller's delivery deadline.
• Commitment: Commitments of the seller and buyer related to the order.

In addition to the above main components, orders may contain additional information depending on the needs and characteristics of each business or organization:

• Name and date of order
• Information of the seller and buyer, including name, address, contact information...
• Product description: product name, product code, model, type...
• Contract Code
• Payments
• Special instructions (discounts, freebies,...)
• Signatures of both parties

4. Popular forms of Purchase Order today

Depending on the size and specific requirements of each business, the PO will be different. Below is the current popular Purchase Order classification:

4.1. Standard Purchase Order

Standard Purchase Order is the most common type of PO, used in most purchasing situations. Standard Purchase Order includes basic information about the order such as quantity, price, payment conditions and terms related to the purchase.

4.2. Blanket Purchase Order

This type of PO is used when a business wants to purchase goods from a supplier within a certain period of time. Instead of setting up detailed information about each order, Blanket Purchase Orders typically specify quantity, price, and general conditions.

4.3. Contract Purchase Order

Contract Purchase Order is used in case of long-term contract purchases. The contractual PO includes delivery time, price, quality regulations and payment terms.

4.4. Planned Purchase Order

Planned Purchase Order is a type of PO used to determine future purchasing needs based on production or project plans. The planned PO does not require information about a specific delivery date, but only identifies the estimated quantity and time of purchase.

4.5. Service Purchase Order

Service Purchase Orders are typically created when purchasing services instead of physical goods. This type of PO includes information about the service requested, service delivery time, price, and other related terms.

5. Process of using Purchase Order in business

In addition to the general question about what a Purchase Order is, many businesses also have the same concern about how to create effective purchase orders in business. Accordingly, to use PO properly, the company needs to fully and correctly perform the following steps:

• Step 1: An employee in the organization (usually purchasing, accounting, or project management) identifies the purchasing need. The employee will create a purchase request, including product information, quantity, unit price, and any other special requests.
• Step 2: The purchase request is sent to relevant departments for confirmation and approval. The approval process is determined based on the rank and authority of each person in the organization.
• Step 3: As soon as the purchase request is approved, a PO will be created by the buyer. PO includes all necessary information about the order, including: PO number, PO date, buyer and seller information, product/service information, quantity, unit price, total value, terms Payment terms, delivery terms...
• Step 4: The PO is then sent to relevant departments (such as purchasing, accounting) for review and approval.
• Step 5: After the PO has been approved, it will be sent to the supplier for the seller to update detailed information about the order and terms that need to be complied with.
• Step 6: The supplier reviews the PO and confirms the terms and conditions of the order, ensuring that both the organization and the supplier agree on the terms of the contract.
• Step 7: After the PO has been confirmed, the supplier will deliver the goods and provide services as requested in the PO. The organization's consignee is responsible for checking and confirming whether the goods/services fully meet the standards and requirements in the PO.
• Step 8: The accounting department will process payment to the supplier based on the information in the PO after the goods/services are received.

6. How to manage Purchase Order effectively

To effectively manage POs, in addition to firmly grasping the definition and how to make purchase orders, businesses also need to implement some of the following useful solutions:

• Strong supplier profile management ensures clarity, accessibility, and streamlined procurement. This makes supplier selection easier and more accurate.
• Classify products and services to buy according to needs and budget, separate purchases into multiple categories. Thanks to that, the company can grasp cost limitations and have good financial control.
• Implement a purchase approval system to control costs and prevent unsatisfactory purchases. Proper approval processes help minimize errors, especially when orders overlap with previously ordered products.
• Set up inspections to ensure quality, maintain accurate data for orders. Through this, businesses can significantly reduce errors, especially related to quantity, shipping, taxes, prices,...
• Store and manage records properly to limit loss, confusion and ensure confidentiality.
• The order cancellation process needs to be clear, accompanied by an official document, including relevant information and approval signature.

7. Difference between Purchase Order and Sale Contract and Proforma Invoice

In a sales transaction, there are 3 important types of documents to note: Purchase Order, Sale Contract and Proforma Invoice. Each type of document has unique characteristics and roles.

PO (Purchase Order) is an order sent by the buyer to the supplier. PO has the same value as a purchase request to the supplier according to the information listed in the order. However, the legal value of PO is lower than that of PI and SC.

PI (Proforma Invoice) is a draft invoice drafted by the supplier when the two parties conduct a transaction. PI clearly states information about goods, quantity, unit price, amount, terms, conditions, etc. However, PI is not used for payment and is considered an official contract.

SC (Sale Contract) is an official sales contract that represents the agreement of both parties on the terms related to the transaction. The SC must include all necessary information, such as information about the participating parties, prices, goods, warranties, penalties, etc. The SC has the highest legal value among these three types of documents. .

In short, PO, SC and PI are all important documents in the buying and selling process. Importers and suppliers need to understand these characteristics to ensure transactions run smoothly and efficiently.

Above is detailed information about what a Purchase Order is and how to manage Purchase Orders effectively. Understanding POs will help businesses reduce risks and improve business efficiency. For other related details, please visit 1C Vietnam website to update useful information on corporate governance.