Purchase Order Utilzation

I believe purchase orders are one of the most misunderstood and misused accounting tools in business. We have over complicated a simple control and use it incorrectly every day. Purchase orders are so much more than “something I need to have on an invoice.” Think of it as a contract between you and the vendor, an understanding of what you expect to have done, and be invoiced. It keeps the vendor from sending too many “widgets,” or for charging too much for them. It’s such a great control but requires discipline to utilize it the right way, every time an order is placed for materials, parts, or service.

In the same way customers use PO’s for a control in purchasing, great vendors/suppliers should require customers to use PO’s for many of the same reasons. A vendor can interpret receiving a PO from the customer as “I am authorized to produce x amount of widgets for a specific price.” Or the same can be said for a service. The customer has given the vendor authorization to provide a service for x amounts of hours at a given rate. If the vendor gets to a point where they need to spend more time then they should ask for additional time on the PO or request a second PO be provided.

Utilizing PO’s, both as a buyer and a seller will greatly improve the value of your business. Having control over what is being purchased is a great way to improve the bottom line!

Finally, it doubles as a great communication tool!