Your small business is off to a strong start, steadily increasing its client base and perhaps even growing its staff. However, before it graduates from small to mid-sized, take heed of your business’s important but oft-forgotten administrative processes, such as procurement.

For instance, how often is your business ordering supplies? Are these orders neatly tracked or placed haphazardly? Does your business have purchase orders in place?

Though they may seem like bureaucratic minutiae, purchase orders are a crucial piece of smoothly running an operational small business.

Why do purchase orders matter?

Purchase orders (POs) are documents issued from buyers to vendors to communicate an order for goods or services. They benefit businesses by:

  • Reducing the possibility of duplicate orders
  • Consolidating information to aid in tracking payments
  • Managing an organization’s expenses
  • Increasing organizational efficiency

A purchase order also benefits the vendor, also known as the supplier, in the event the buyer refuses to pay, as the order serves as a legally binding contract.

What’s the difference between a purchase order and an invoice?

Since both provide a record of transaction between a buyer and seller, it’s easy to confuse the two documents. Here’s the key difference, though:

  • A buyer sends a purchase order to a vendor (also known as a seller or supplier) in order to confirm their intent to buy the listed goods and/or services.
  • A vendor (also known as a seller or supplier) provides an invoice to a buyer to charge the buyer for their provided goods and/or services.

The two are often used in tandem, with an invoice generally following a purchase order or coming after goods/services have been delivered. Consequently, invoices should contain information that matches their corresponding purchase orders; some may even directly include the purchase order number itself. A wide variety of invoice templates are available online.

Purchase Order Best Practices for Small Businesses

Without further ado, follow these best practices when it comes to making purchase orders for your small business.

Opt for an electronic purchase order system.

There’s no one way to issue purchase orders, but consider going digital with yours. Electronic purchasing systems save you the hassle of using manual pen-and-paper orders and filing these documents responsibly for audit season. Moreover, not only do these electronic systems prevent you from misplacing or damaging paperwork, they also provide an environmentally friendly alternative to printing all the documents involved in a purchasing cycle.

Set clear expense categories according to your budget.

Business expenses vary from office equipment to product supplies and equipment to outside services and more. As such, establishing clear expense categories can be helpful for better tracking your cash flow. It may also help to set pricing thresholds so that purchase orders remain within the bounds of your business’s budget, e.g., capping equipment purchases at a certain figure.

Use a purchase approval system.

Enforcing an approval workflow can help prevent purchases from getting out of hand, especially in the event duplicate orders are placed for the same product. To avoid scenarios of this nature, appoint a purchase manager to approve orders before they’re submitted to your vendor. Establishing an approval workflow helps to control organization costs and prevent financial mismanagement.

Create a vendor directory or database.

Consider creating a spreadsheet directory of all of the different suppliers your business orders from, with all of the information necessary to complete an order, e.g., address, contact number, payment terms. Having this database can streamline the purchasing process by acting as a reference and guide for the best supplier to buy from. It can even help in deciding which vendor to move forward with in the event you want to establish a long-term contract.

Write up a PO guide for employees.

Having a PO guide on hand establishes ground rules and expectations for your team when making purchasing decisions on behalf of your company. For instance, should employees always select the lowest priced goods in order to cut back on business expenses? Or should they opt for more expensive goods to account for quality? Perhaps there’s a particular rule of thumb you want to enforce for a more consistent purchasing strategy among your team members. In any case, a guide serves as a useful reference to not only outline procedures for more specific purchasing scenarios but to also train new employees in choosing and negotiating with vendors.