How does a Purchase Order work?

In order to unify the transaction process when ordering resources for your company, a step-by-step procedure should be followed when using a Purchase Order (PO) in order to maximise its effectiveness and precision.

Depending on the nature of a company (i.e., size, industry, human resources, organizational structure, etc.), the PO procedure is flexible and subject to modification to include additional necessary steps like quality checks, budget approval, and more.

Here’s a breakdown of a typical transaction involving a purchasing order from the perspective of a purchaser:

1. The purchasing department at your company is notified by management that a purchase needs to be made. Some companies do this by issuing a purchase requisition form.
2. If the department approves the order, they fill out a purchase order detailing exactly what the purchase is.
3. The purchase order is then sent to the vendor, who decides whether they can and want to fulfil the order. Once they approve the purchase order, it becomes legally binding.
4. The purchaser sends payment for the agreed price (or does so at an agreed-upon later date, which is specified on the purchase order.)
5. The vendor delivers the order along with an invoice. The purchaser’s finance department then compares this invoice to the purchase order to make sure that the two documents agree with each other.

Key Takeaways

A purchase order’s procedure is flexible and typically depends on the nature of the company involved.

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