What is a PO? Rules for using and managing PO most effectively
What is a PO? Rules for using and managing PO most effectively

PO stands for Purchase Order. This is a concept not too unfamiliar to individuals and organizations, especially commercial enterprises. But in reality, what is a PO, and what is its significance in commercial activities? Let’s explore PO with VSM in the article below.

What is a PO?
What is a PO?

What is a PO?

PO is the purchase order
PO is the purchase order

PO is a concept related to the purchase order. It is an electronic commercial document sent from the buyer to the supplier to authorize the purchase of goods or services. The PO is a formal binding contract that allows customers to buy goods or services.

The PO must include all details of the business transactions. It includes the negotiated prices for each product that the customer buys, including style and color.

POs are now used to formalize payment and shipping terms. Each placed order will have a unique number, making it easy for the business to track payments and match with shipping records.

Significance of PO

Fully legal invoice in PO
Fully legal invoice in PO

A PO is an essential document with great significance for businesses. It is used to check and assess issues related to orders.

After contracts are written and both parties sign, a PO will include details such as the quantity of goods, prices, terms, and payment status, along with various other conditions. The main purpose of a PO is to make daily transactions more convenient by identifying services and items required.

A PO allows customers to clarify their needs and desires with suppliers when making purchases. Both parties can use them in cases where orders are not delivered on time as discussed in the PO.

In the absence of formal contracts, a PO can become a legally binding document when accepted by the supplier, making it a highly legal document.

Other Information about PO

Contents in PO
Contents in PO

To ensure clarity, understanding, and inclusion of all necessary information during the ordering and purchasing process, a PO will typically include the following basic elements:

  • PO number
  • Date of PO issuance
  • Information of the seller/buyer
  • PIC (Person in Charge) in the PO
  • Description of the goods and products
  • Quantity of goods and products purchased
  • Technical specifications of the products
  • Unit price
  • Total contract value
  • Payment terms
  • Delivery conditions
  • Special conditions such as discounts, etc.
  • Signatures of both buyer and seller

Distinguishing Invoice and PO

There is often confusion between an Invoice and a PO. Both are documents and types of records issued when purchasing goods. However, it is essential to clearly understand that a PO and an Invoice are not the same, and they serve different purposes as follows:

  • A Purchase Order (PO) is prepared by buyers when they want to place orders for goods and services. Conversely, invoices are generated by sellers to record purchase and sale transactions and payment requests when customers place orders.
  • A PO is sent to the seller, and an invoice is sent back to the buyer. An easy analogy is when you make a purchase on an e-commerce platform; you receive an order confirmation (PO).
  • A PO is only created when the buyer wants to place an order, whereas an invoice is generated once the buyer successfully completes the purchase. Invoices are typically created automatically and managed using software.
  • POs require customers to be aware of the mandatory information in the purchase contract. In contrast, invoices are used to confirm the sales process and store relevant records.

How to Efficiently Manage POs

Currently, POs are among the most important documents for businesses. Therefore, effective management of POs is crucial to minimize potential risks in dealings with suppliers.

Maintain clear and accessible supplier records. This aids in easy and accurate supplier selection.

Establish budgets and control related costs to categorize products and services, supplement inventory, and segregate purchases into various items.

Generate POs based on sales reports in software. You can also utilize software to evaluate the sales performance of each product by supplier, enabling you to monitor customer demand and plan accordingly.