Purchase Orders Quiz. How Do You Measure Up?

https://uk.practicallaw.thomsonreuters.com/6-502-9095?transitionType=Default&contextData=(sc.Default)&firstPage=truepurchase order educationThe effective use of purchase orders are an integral part of any successful business. This blog intends to cover some of the common questions we encounter, it is by no means an exhaustive list so if you still have questions after reading this then please do feel free to get in touch.What are purchase orders?

A purchase orders is a legal document sent from someone who wants to buy something to a supplier with a request for an order. The item description, quantity of items and agreed upon price should all be visible on the purchase order.  Details are key here, the more specific the order and the more details that are included in it means the purchase order will be more effective. When a seller (supplier, vendor, provider, etc) accepts a purchase order, a legally binding contract is formed between both parties involved. The buyer should also always clearly and explicitly communicate their requests to the seller so there is no confusion or any discrepancies when the purchase order is fulfilled. The purchase order also protects the seller, in the event the buyer refuses payment, the seller is protected because, as mentioned above, the purchase order is a binding contract between both parties, so deviations from either side are not acceptable.

What is an After the Fact (ATF) purchase?

An After-the-Fact Purchase Order Occurs when goods or services are received prior to having an approved purchase order.

What does a purchase order look like?

Purchase orders are generally  a standard document. They should contain company information such as name and address, contact information, shipping details sometimes vary from company address and should also be present, a purchase order number, vendor information such as name and address, information about the order like product description/name, price and quantity needed, as well as any additional details to the vendor. Sometimes in the case of using a regular supplier, the buyer may have been issued a customer ID which should also be included.

Why are purchase orders important to your business?

Quite a few businesses unwisely opt out of the use of purchase orders because they worry the paperwork will be too time consuming, other feel that they have a good relationship with their vendors and don’t need to worry about anything to do with the relationship. A paper system is time consuming, costly, unreliable and takes up a lot of space due to filing, an electronic system is time saving, cost effective (even cost saving in most cases) reliable, environmentally friendly and even streamlines future processes like reporting or auditing. When businesses start out they will tend to grow an organic purchasing process. The issue is that processes change over time  as companies develop relationships with their sellers. Once a company grows to the point where purchasing demands become more specific, urgent, and/or complex, communication issues can arise if a purchase order isn’t used or certain details are incorrect on the order. If a buyer receives their order and it does not comply with the desired specifications, if there is no purchase order for referencing, it can be a hellish for either party to establish where the request went wrong. By this time it’s commonplace that both payment and an invoice have been sent, and as such places  both parties in a significantly more complicated legal situation. A purchase order provides legal clarity and concrete instructions for the seller, as well as a documented “paper trail” that can be used as a point of reference for when things go wrong. When the chips are down business is business and both sides are likely to be pointing the finger at each other if things do go wrong, no matter how good you perceive the relationship to be.

How are purchase orders different from an invoice?

It is the buyer that  drafts a purchase order. Sellers are the ones who prepare invoices. Purchase orders ask for goods or service and invoices request payment for the delivery of said goods or services. The purchase order and the invoice should contain similar details. The invoice should reference the purchase order number in order to confirm that both documents contain the same information and correspond to each other. Another difference between the two is that the technical details supplied in the purchase order are not included on the invoice.

Why are manual procedures inefficient?

If you currently use a paper-based process, chances are you are creating an excessive amount of documents and it will take a significant amount of time to generate each. On average most companies process around seven or eight documents during a purchasing cycle, including but not limited to requisitions, purchase orders, quotations, order acknowledgements, advice notes, goods-received notes, packing slips,  and invoices. That’s for every single purchase, you then need to store it, track, report on it and with a paper system that means lots of filing cabinets and misplaced, damaged or even tampered with documents. Auditing is an extremely lengthy process too as often what you are looking for cannot be found where it should be. With paper, it’s also generally quite hard to spot duplicate requests, purchases, or invoices, or even missed transactions, all things that will undoubtedly cost your company time and money. Electronic systems are the best way to counter all of these issues.

There is a debate between you and your supplier about contract terms, who is right?

This is such a commonplace occurrence that it even has a name ‘battle of the forms’. Basically the terms and conditions associated with the last piece of paper or electronic correspondence exchanged between the parties related to the order determine whose terms and conditions apply. You really need to be mindful of possibly challenging each piece of paper that comes from a supplier and determine whether they have applied their terms and conditions and ,if necessary, you will want to challenge this.

How should a purchaser respond to a request from a supplier for an unscheduled price rise?

The supplier always needs to give reasons for the price rise. There could be many reasons like a change in government legislation or it may, for example, be due to a natural disaster such as the earthquake in Japan which caused serious disruption to the manufacture of components for export to Europe. First you need to consider if there is a formal contract in place and  what the terms regarding price fluctuation are. If the contract stipulates a fixed price, you should remind the supplier of this but you should also be willing to look into how both parties can reach a win-win situation as this will preserve the supply chain relationship. If  there is no compromise to be reached, the supplier may well have to pull out of the deal. There are risks to the your organization if the contract breaks down – the products being supplied may be vital to the infrastructure of the business and if this supplier is affected by something as above it’s certain any other suppliers would be too. Proactive negotiation to maintain the relationship is the best course of action. While the organization may be unable to accept an increase in price, the breakdown of the contract should only be viewed as a last resort.

Do we have to keep printed purchase orders?

Legal documents need to be stored for seven years, six years is the limitation period for claims for breach of contract to be litigated, so seven years is safely beyond the point that your purchase orders could be in dispute with your suppliers. Six years is also as far back as the Inland Revenue can reopen your tax affairs, except in the case of fraud, which is also commonplace when using paper systems. Purchase orders only have to be good enough to convince the auditor, the Inland Revenue, and – in the event of court action – the courts. There really is no reason why they should not be in electronic form. In fact electronic storage is just one of the many benefits of having an electronic system in place.

Here are a list of questions frequently asked by people who use paper systems, I don’t have the answers 🙂

  • Where is the person who needs to sign this purchase order?
  • Are you sure you are not the correct person to sign this order? Because the person you’re telling me to see told me to see you.
  • Why isn’t the paperwork I’m looking for in the correct place?
  • Why is the wrong paperwork attached to this order?
  • Where is the accident report book? The filing cabinet hurt me again!!
  • Is this a prescription? I can’t read the handwriting!
  • Why is the signature I need always so far away?
  • Why do we have so many orders for the same thing?
  • Why does it take all day or longer to get an order raised and approved?
  • How many more filing cabinets do you intend on squeezing into my office?
  • Who should be signing off on this order?
  • Did we ever receive xyz from abc?
  • Has this invoice been paid?
  • Why did you pay this invoice? We never ordered anything like this and we’ve never even heard of this company!

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