Purchase order systems are one of the key financial systems that can be put in place to control spending within an organisation – with surprising benefits.
1. Give company management an overview of all spending
Purchase orders can be used to completely control spending with an organisation as all spending has to be rubber stamped before it is authorised. This prevents staff members from making purchases outside of their remit, and allows the company to put a process in place so that each purchase leads to a discussion of whether it is necessary or not.
While such processes might seem like micro-management at its worst, different levels of management can be allocated levels of sign-off rights, so that company functions are still delegated out.
2. Record orders for reconciliation against supplier invoices
Suppliers love to take orders; it’s in their nature. However, the supplier doesn’t know which project the item is for, what customer you are selling the product to or why you are purchasing the item.
A purchase order provides a way to store this information at the point of ordering so that when an invoice arrives from the supplier it can easily be reconciled against the information available.
3. Reduce unnecessary spending by preventing over purchasing
Creating a purchase order requires a creator to think about the purchase, whether it is truly needed and whether the quantities of that order are correct.
Along with management oversight of the order, the thought that has to go into purchase order creation means that orders are more accurate, there is less waste and spending is reduced.
4. Provides a contract between purchaser and supplier
In many countries a purchase order is considered to be a legally binding contract between the supplier and purchaser. The purchaser is committing to pay a specific amount for an item, which the supplier will deliver on the agreed delivery date. This means that it is difficult for the supplier to go back on a purchase order once it has been accepted.
5. Better cash flow management within the business
As soon as purchase orders are collated, they become a useful tool for managing cash flow within the business. ‘Cost of sales’ figures are available quickly and supplier credit limits can be managed.
For a practical guide to setting up a purchase order system, download our free ebook here.