Keywords
vendor
No items match your query.
Try expanding your search.
ResourcesArticles
Finance operations
March 7, 2024

Best practices for purchase order management

Shyam Sundar
,
Assistant Manager F&A, Infosys BPM
In this article
    You might like
    No items found.
    Spending made smarter
    Easy-to-use cards, spend limits, approval flows, vendor payments —plus an average savings of 5%.1
    |
    4.8 Rating 4.8 rating
    Error Message
    No personal credit checks or founder guarantee.
    Thank you! Your submission has been received!
    Oops! Something went wrong while submitting the form.
    Get fresh finance insights, monthly
    Time and money-saving tips,
    straight to your inbox
    |
    4.8 Rating 4.8 rating
    Thanks for signing up
    Oops! Something went wrong while submitting the form.
    Table of contents
      This post is from Ramp's contributor network—a group of professionals with deep experience in accounting, finance, strategy, startups, and more.
      Interested in joining? Sign up here.

      ‍

      What is a purchase order?

      A purchase order is a document issued by the buyer to the seller, stating the type of the product, quantities, and agreed price of the goods or services. If a vendor accepts the purchase order, it'll turn into a contract for both parties. It's a document authorizing the supplier to provide a specific product or service at an agreed-upon price and delivery date. 

      Why are purchase orders important?

      A purchase order is important because it serves as an official request for goods or services and is used to track the progress of an order, including payment and delivery.

      1. Legal protection: Purchase orders provide legal protection for both the buyer and the supplier. They clearly outline the terms of the agreement and can be used in court if there is a dispute.
      2. Cost control: Purchase orders help buyers control costs by setting a clear price and delivery date for the goods or services being ordered.
      3. Payment tracking: Purchase orders can be used to track payments and ensure that suppliers are paid on time.
      4. Auditing: Purchase orders can be used for auditing purposes to ensure compliance with company policies and procedures.
      5. Communication: Purchase orders facilitate communication between buyers and suppliers, ensuring that both parties are on the same page regarding the details of the order.
      6. Compliance: Purchase orders help with compliance with purchase regulations and legal requirements.
      7. Supplier relationship management: Purchase orders are a critical tool for managing supplier relationships and ensuring that suppliers provide goods and services that meet the buyer's needs and specifications.

      Contents of a purchase order.

      A purchase order typically contains the following information:

      1. Date of issuance
      2. Purchaser's name and contact information
      3. Supplier's name and contact information
      4. Description of goods or services to be purchased
      5. Quantity of goods or services to be purchased
      6. The unit price of each item
      7. Total amount of the order
      8. Payment terms
      9. Delivery date or time frame
      10. Shipping instructions and address
      11. Any special requirements or specifications
      12. PO number
      13. Signature of the purchasing authority

      Format of an example purchase order

      Types of purchase orders

      1. Standard purchase order: This Purchase order is a normal purchase order that is created for a one-time purchase of materials.
      • Example: Purchase of office supplies.
      1. Blanket purchase order: This type of purchase order is used when a buyer needs to purchase multiple items from a supplier over some time (typically six months or one year).
      • Example: Purchase of raw materials over six months.
      1. Contract purchase order: This PO is created to specify terms and conditions with the vendor, and it doesn't specify the materials required.
      • Example: Number of units required over six months and the payment terms and conditions.
      1. Planned purchase order: This PO is created for long-term agreements to buy materials from one vendor. It doesn't specify the delivery date, but it gives the supplier an idea of the quantity and timing of the buyer's future purchases.
      • Example: The quantity of materials, estimated costs, and tentative delivery schedules must be specified in this PO.

      Some best practices for verifying the accuracy of purchase orders

      It's critical to issue an error-free purchase order to the vendor to acquire the goods/services in the correct amount, price, and product. This saves time, meets the needs of the client, and achieves the ultimate goal. The purchase order delivered to the vendor must have all of the necessary details to furnish the goods/services as per the quote shared. Any errors in the PO will have a significant impact on the business and the client's confidence.

      ‍

      The recommended best practices listed below can be used to issue the correct PO.

      1. Keep a quality control checklist: It should include information such as the price, quantity, product/service details, vendor information, and any other terms and restrictions. Check that the information on the PO is valid according to the quote.
      2. Seek approval at multiple levels: This ensures that the PO is error-free at many stages before it is finalized. The approving authority must verify the purchase order to guarantee the accuracy of the contents.
      3. Make use of technology: Make use of technologies such as ERPs that provide automatic checks and validations to reduce human errors.
      4. Provide training: Training would aid in improving accuracy and allowing users to adhere to rules to avoid errors. PO errors can be avoided if these steps are implemented efficiently and effectively. 

      What is a purchase order short-close?

      A purchase order short-close refers to the process of closing a purchase order before all the goods or services listed on it have been received or fully delivered. Such purchase orders would remain open for a longer period of time without any transactions, and closing the PO helps to keep the budget in an efficient manner.

      ‍

      A purchase order short-close plays a crucial role in maintaining accurate financial records, ensuring proper inventory management, and resolving any discrepancies or issues related to the purchase order. By implementing a purchase order short-close, organizations can maintain clear visibility into their procurement processes, avoid overpayment or underpayment, and streamline vendor relationships.

      ‍

      This systematic approach fosters efficient purchasing practices, minimizes financial risks, and enhances overall supply chain management.

      1. Partial delivery: Short close becomes necessary when a portion of the goods/services are delivered, and the supplier is unable to deliver anymore.
      2. Quality issues: A short close can be implemented when the received goods or services do not meet the specified quality standards or are defective.
      3. Pricing issues: A short close is needed if there is a significant difference between the agreed-upon price in the purchase order and the invoiced amount.
      4. Fail to meet the delivery schedule: If a supplier fails to meet the agreed-upon delivery schedule or doesn't fulfill their contractual obligations, a short close can be initiated.
      5. Budget constraints: When a company faces budget constraints and can't fulfil the entire purchase order, a short close becomes necessary to reflect the reduction in the order.
      6. Change in requirements: A short close is needed if there are changes in project requirements, scope, or specifications.
      7. Project or contract completion: At the successful completion of a project or contract, a short close is essential to finalize the purchase order and ensure all outstanding payments or obligations are settled appropriately.

      Disadvantages of a purchase order

      While the PO is a crucial document in the procurement process, it also aids in understanding and tracking the goods and services exchanged between the buyer and supplier. However, there are some drawbacks. Organizations must recognize the drawbacks of a purchase order based on the type of transaction and its specific requirements. 

      1. If the process isn't automated, creating a purchase order requires a significant amount of manual effort.
      2. It lengthens the purchasing process, particularly for larger organizations, because a purchase order must be issued and subject to various levels of approval before being sent to the vendor.
      3. Any modifications to the order call for the rewriting of the purchase order, which delays the procurement.
      4. Not suitable for various sorts of purchases, such as magazine subscriptions, orders for low-value housekeeping products, etc.

      ‍

      The drawbacks can be turned into advantages if the organization handles the process efficiently and successfully through the use of automation or technology such as Ramp procurement. In today's world, manual processes waste hours of employee time, making the process inefficient and causing customer unhappiness.

      What are the risks of an open purchase order?

      Once issued to the vendor, a purchase order must be examined regularly, and timely provisions must be made depending on the items provided and those that have not yet been delivered. To confirm the transaction's accuracy, procurement must raise a goods receipt note (GRN) for the products provided.


      It's important to conduct due diligence on products that haven't been delivered and are still open in the purchase order, such as validating the requirement, checking the supply or availability of the goods, changing the requirement, and so on.


      Open POs mitigate risk to the organization in a variety of ways. Here are some examples:

      1. Unutilized cash: Funds allocated for purchasing the items are being frozen, posing a threat to the overall financial management of the organization.
      2. Change in Price: POs that are open for an extended amount of time have an impact on pricing fluctuations and must spend more in response to changes in market conditions.
      3. Changes in requirements: Business requirements are unavoidable, and each change in the business requirements leads to an outdated PO, resulting in an amendment and delay in meeting the requirement.
      4. Administrative workload: Tracking open POs over an extended period of time increases the procurement team's workload, affecting productivity. Following up with the vendor and responding to operations and finance on open items are just a few of the obstacles in this regard.

      Purchase order best practices

      As a small organization expands into a medium-sized entity and begins utilizing purchase orders for procurement, implementing a purchase order system becomes crucial. The specific setup of this system should match the company's transaction volume and business type, but there are universally applicable best practices to follow during its establishment.

      1. Leverage software and automation: Identifying software like Ramp Procurement, SAP ERP, SAP Ariba, Coupa, and others are some of the most prevalent purchase order creation tools used by most companies.
      2. Vendor creation: The next step is to generate vendor codes for the current ones. This helps to streamline the procurement process by making it easier to select a vendor based on the requirements, and it also helps to send an email notification to the vendor after the purchase order has been created. For example, XYZ Solutions Pvt Ltd's six-digit vendor code could be 700024.
      3. Primary list of items/materials: It's critical to compile a list of material codes that can readily be connected to the purchase order. This makes it easier to track materials and avoid confusion, as well as assetize items depending on their worth and item description. For example: For chairs, a five-digit material code can be 50001.
      4. Specifications of items/material: It's essential to provide explicit specifications for items/services in the purchase order, including item description, price, quantities, and other relevant details. It enables the vendor to meet the need without any confusion.
      5. Approval workflow: Implement clear approval rules to make sure that purchase orders are routed through the right authorization channels before being issued. Approvals can depend on the amount of the request, with bigger values being granted by the head of procurement and lower values being automated without any approvals. For example, A $25,000 purchase order must be sent to the head of procurement, but a $100 buy order can be automated. This helps in compliance with organizational policies and budget restrictions.
      6. Continuous improvement: Evaluate the purchase order at regular intervals by collecting feedback from the relevant stakeholders. This can include the format of the purchase order, information, and the general notes.

      ‍

      Adopting these best practices would enhance a company's purchase order process, leading to better order tracking, efficient management, and clearer communication between seller and buyer, ultimately reducing misunderstandings.

      Next step: implement purchase order best practices

      Implementing best practices in creating purchase orders boosts procurement efficiency by adopting technology, standardizing processes, and setting clear requirements. This approach not only ensures a company's ongoing success but also enhances supplier relations, operational efficiency, and cost control, contributing significantly to the organization's overall achievement.

      Implement PO best practices with Ramp 

      Simplify procurement and prevent bottlenecks with Ramp Procurement by centralizing purchase requests, facilitating seamless approvals, and efficiently managing purchase orders on one platform. 

      ‍

      Customize intake forms, set specific conditional questions, and tailor approval policies to meet your business's unique needs. With options to customize payment methods and detailed steps to guide you through each stage of the process, Ramp offers a comprehensive solution for optimizing your procurement workflow. Experience how Ramp can transform your procurement strategy by setting up your own spend program today.

      Try Ramp for free
      Error Message
      No personal credit checks or founder guarantee.
      Thank you! Your submission has been received!
      Oops! Something went wrong while submitting the form.
      Shyam Sundar
      Assistant Manager F&A, Infosys BPM
      Finance professional and P2P specialist with over 18 years of industry experience in IT, insurance, and NBFC. In my present work, I assist the team and organization in achieving their goals and improving the process through automation and adjustment as needed depending on business requirements. Excited about taking on new challenges and aiming to enhance the process through close collaboration with the team. Also, contribute to the LinkedIn community by sharing knowledge and building connections with like-minded people. Aside from work, I love to travel and take images and videos. Watching movies, cricket, cooking, family time, playing with kids, and so forth.
      Edited by
      ,
      Reviewed by
      ,
      Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

      FAQs

      How Mindbody & Classpass saved time, enhanced visibility, and improved usability with Ramp

      “We were going to hold office hours, but it was so quiet that we never needed to. All the feedback was positive -- it was very easy to roll out.”
      Heather Bruzus, Principal Accountant, Mindbody & Classpass
      Read case study

      How Rarebreed Veterinary Partners Prepared for Scale with Ramp

      “I can look in Ramp and see my spend for the month immediately. I don’t have to go on 14 different platforms. It’s all right there.”
      Eric Chabot, VP of Accounting & Controller, Rarebreed Veterinary Partners
      Read case study

      How Tomo drove efficiency and slashed time to close with Ramp

      "Bringing our close timeline down by half has given us so much more time for projects and analysis.”
      Eric Ho, SVP, Head of Finance, Tomo
      Read case study

      How Crowdbotics streamlined, centralized, and saved with Ramp

      “We switched from our legacy provider to Ramp in under a week and heard zero complaints."
      Miles Lavin, VP of Strategic Finance, Crowdbotics
      Read case study

      How Ramp Helped REVA Air Ambulance Save Time, Improve Visibility, and Gain Peace of Mind

      “We were able to mold Ramp to our company to set it up as needed within departments. But the biggest selling feature to us was the automatic, real-time integration with Sage.”
      Seth Miller, Controller, REVA
      Read case study

      How Heyday Skincare gained control over 23+ entities with Ramp

      “Ramp has been a saving grace by organizing and consolidating systems and giving us real time visibility across 23 entities.”
      Shawn Gordon, Sr. Accounting Manager, Heyday Wellness
      Read case study

      How Ramp helped Rustic Canyon Restaurant Group promote a culture of financial awareness and responsibility

      "Ramp has helped promote a culture of awareness and accountability, there's no swipe your card and forget about it, people are more attuned to why and how they are spending."
      Derek Arnette, Controller, Rustic Canyon Restaurant Group
      Read case study
      About UsCareersEmerging TalentCustomersHelp CenterProduct AnnouncementsAPI DocumentationInvestor DatabaseVersus
      Ramp Business Corporation
      28 West 23rd Street, Floor 2
      New York, NY 10010
      Join the 25,000+ businesses simplifying their finances with Ramp
      Error Message
      No personal credit checks or founder guarantee.
      Thank you! Your submission has been received!
      Oops! Something went wrong while submitting the form.
      © 2024 Ramp Business Corporation. “Ramp” and the Ramp logo are registered trademarks of the company.
      The Ramp Visa Commercial Card and the Ramp Visa Corporate Card are issued by Sutton Bank and Celtic Bank (Members FDIC), respectively pursuant to license from Visa USA Inc. Visa is a registered trademark of Visa International Service Association. All other trademarks and service marks belong to their respective owners.
      1. We calculate average savings as a percentage of an illustrative customer's total card spending when using Ramp features designed to reduce business expenses. Keep in mind that this percentage is an estimate, not a guarantee. Ramp delivers savings from more than just card spending; savings can also come from non-card expenses so we may factor decreases to non-card spending into our calculation. For example, savings may result from reduced time spent on manual expense tracking, the financial benefit of cash back or other rewards, smarter expense monitoring, and eliminating costs associated with alternative solutions. Our calculations are based on platform data, industry research, customer surveys, and info on alternative options. Your actual savings may vary.
      Please visit our Terms of Service for more details. Read our Editorial Guidelines and Privacy Policy.
      Ramp Payments Corporation - NMLS 2371465, Ramp Financing Corporation - NMLS 2431387
      Download on the App Store
      Ramp Verification Full Badge
      Linkedin LogoFacebook Logo