Learning how to properly manage procurement is crucial for the success of every small business. If you don’t have a systematic approach for managing your own procurement, you’ll risk making costly purchasing errors.
Purchase orders are the most important part of the process when it comes to implementing an effective procurement management system. To properly manage your business, it’s important you know the main types of purchase orders. This report will also help you understand how funding purchase orders can aid in the growth and expansion of your business.
The Definition of Purchase Orders
Purchase orders are created by buyers who want to purchase goods or services from their suppliers. Generally, purchase orders contain the products you want to purchase, the quantity, price, payment and delivery conditions. In this way, there is concrete evidence confirming what the buyer and supplier have agreed on. This makes purchase orders a basis for, and in a contract between vendors and buyers.
There are four different types of purchase orders every entrepreneur should know about:
1. Standard Purchase Orders
Standard purchase orders are the most popular forms because they’re the easiest to understand. As mentioned, you can find all the key details in a standard purchase order:
- The type of items you want to buy
- The quantity
- The price, as well as the payment and delivery terms.
This type of purchase order is best used for occasionally demanded items, one-off purchases, or purchases where you know exactly what, and how much you need to buy.
For example, hotels may send a purchase order to buy new beds and chairs. If everything goes smoothly, this should be a one-time purchase for the hotel and the contract will be fulfilled once the beds and chairs are delivered.
2. Blanket Purchase Orders
This type of order combines multiple purchase orders into one. It also details the items you’re looking to purchase and the quantity you need. However, it may or may not include the cost of the goods. If the price is included, it may contain price breaks the seller offers.
For instance, a company may want to order printer inks but they don’t know when and how often they’ll order. When this happens. The company can send a blanket purchase order.
3. Contract Purchase Orders
In contract purchase orders, the buyer has no idea regarding the type of items they will order. The buyer and the seller will instead agree that the buyer will purchase from the said supplier once they know what it is they want to order.
A contract purchase order acts as a binding agreement that states that you will purchase from the supplier in the future. This type of purchase order usually lasts up to a year and during this period, you can send a standard purchase order that specifies the details needed for the purchase.
4. Planned Purchase Orders
With planned purchase orders, most details of the purchase are indicated in this type of purchase order. This may include pricing, payment terms, and the items you want to buy. However, the terms of delivery are unknown. In other words, you only commit to the price and the quantity of your purchase – not the delivery date.
For instance, your laundry businesses might need to buy 25,000 sachets of detergent within the year. You can create a planned purchase order by indicating the price and quantity of your purchase, as well as a tentative delivery schedule. If your business used 5,000 detergents, you can create a release against the planned purchase order so you can order more.
How Funding Purchase Orders Can Help Your Business
Did you know that you could use your purchase orders to receive funding? Purchase order financing is a great option for businesses that need cash flow to purchase inventory and fulfill customer orders. Generally, a financing company will pay your supplier to manufacture the products and have them send it to the customers. The customer will then pay the purchase to the lending company. The lending company will deduct certain fees before sending the rest of the film to you.
If you don’t have enough cash flow to complete customer orders, you can benefit from funding purchase orders. For instance, small businesses and startup companies may not have enough capital to fulfill a customer order. Therefore, applying for purchase order financing ensures that you don’t have to turn a customer away and risk tarnishing your reputation.