Purchase Order Process – What It Is and Why It Matters

Trade is ever-expanding, as recent research states that global trade has set records of $32 trillion in 2022 alone. This means more purchases between organizations and therefore more purchase orders to process.

The purchase order process is a crucial aspect of the procurement cycle in business. It involves creating and approving a document that outlines the details of a purchase, such as the items or services to be purchased, their quantities, prices, and other relevant terms and conditions.

This process helps organizations control spending, streamline purchasing activities, and maintain accurate records of their purchases for accounting, financial reporting, and compliance purposes.

Traditionally, the purchase order process was manual, which was time-consuming and error-prone. However, with the emergence of technology, organizations can now automate the purchase order process using software and significantly improve their accounts payable system.

In this blog, we will discuss the contents of a purchase order, the types of purchase orders, and the steps involved in creating one. We will also explain how automating the purchase order process can benefit your company. Let’s start!

What is a Purchase Order?

A purchase order, also known as a PO, is a legally binding and commercial document, issued by a buyer to a seller. It is created to request the purchase of goods or services by a company but is also used to register the sale that takes place between the two parties. 

Besides indicating the conditions on which the transaction takes place, the purchase order’s aim is to streamline the purchase. This is done by keeping a record of all relevant information for future reference. 

In order to streamline the process and make life easier for both the seller and the buyer, the purchase order contains essential information, such as: 

• Specifications and quantity of the items required 
• Contact information
• The price at which goods or services are to be purchased 
• The order date 
• Delivery timelines and details
• Payments terms and conditions 
• The purchase order number for tracking 

This information is mandatory on all purchase order types, regardless of their type and use. Before issuing a request for a purchase order, you might want to find out which type of purchase order suits your company best. Keep reading and let’s find out!

Purchase Order Types

Purchase orders can vary depending on different factors. Such factors can be the type of transaction you are engaged in or the kind of payment you have chosen for a settlement. Here you can see a detailed explanation of the purchase order types: 

• Standard purchase orders: The standard purchase order is most commonly used for one-off purchases. They are created whenever a company needs certain goods on a singular basis.

• Planned purchase orders: Planned purchase orders contain all vendor and payment information, similar to the standard POs, and are created especially if the payment is set to be paid in installments. 

• Blanket purchase orders: Blanket purchase orders are used by companies in order to request an unspecified amount of goods from a supplier, over an unspecified amount of time.

• Contact purchase orders: Contact purchase orders are used to create a commercial relationship between the two parties, where the vendor’s details, payment, and delivery requirements are set, but a standard PO would still be generated.

PO Process Flowchart

Now that we have got you up to speed on the details of purchase orders and found out about the different types of purchase orders that exist, it is time to dive into the actual purchase order process. 

Here’s a typical flowchart for the purchase order process, including:

1. Request
2. Creation
3. Confirmation
4. Recording
5. Dispatch & Delivery
6. PO matching

Purchase Order Process Steps

So, what does the purchase order process look like in more detail? In the following, we will explain the steps involved in handling purchase orders, starting from their creation, up until the closing of the purchase. Let’s see a breakdown of the steps: 

• Request: Before any purchases can be made, the company that wants to place an order at a vendor, issues a purchase request and sends it to the financial department. Once the request is approved by the financial department, the purchase order can now be created. 

• Creation: After approval from the financial department, the buyer initiates communication with the vendors and agrees on the specifications of the purchase. This means settling the amount of the goods, the price, and the terms of delivery. All the established details need to be mentioned in the purchase order. 

• Confirmation: Before sending out the goods, the seller checks the purchase order to see if all the agreed-upon details are correct. If everything is written accordingly, the purchase order can be confirmed. In case of any discrepancies or flags of concern, the seller can also reject the order. In case of rejection, the document is sent back to the buyer and the request is considered void. 

• Recording: As one of the aims of the purchase order is to streamline the process of business transactions, the purchase order is registered in the organization’s accounting software for future reference. 

• Dispatch and Delivery: The seller delivers the goods or services, keeping their end of the agreement. That is when the buyer performs a quality check on the goods, to verify whether the delivery fulfills the settled specifications. These quality checks help identify any shortcomings, so the seller can be notified immediately. 

• Matching invoices with purchase orders: After the goods have been approved, the purchase can be sent for closure. The vendor sends an invoice that is processed and approved by the buyer’s financial department. This is where the two-way matching process takes place. The two-way matching process consists of checking if there are any discrepancies between the invoice and the purchase order.

Common Mistakes of Manual PO Processes

The challenges coming with a manual PO process should not be underestimated. These processes are costly, efficient, and time-consuming but also require an excessive amount of documentation for each transaction.

The acquisition, storage, and transmission of these documents through approval channels are burdensome tasks, with constant concerns about loss or damage along the way.

The disadvantages of manual ordering processes are various, such as:

• Lack of transparency in the supply chain
• Increased organizational effort
• Extended processing cycles for POs
• Dependence on human intervention
• Existence of process bottlenecks and compliance risks
• Endless loops of emails and human involvement
• Inconvenient processes that are prone to inaccuracies and errors

It appears that there are numerous pitfalls associated with manual PO processes. However, if this concern arises, there’s no need to worry because there is a solution: Automating the PO Process.

PO Process Automation

The purchase order process is lengthy and quite complex. Often, it’s also a manual process, which calls for constant human input.

Besides slowing down the process, the manual PO process leaves space for human errors. This comes with certain risks, as purchase orders can be affected by accounting errors, caused by human mistakes, and it represents a risk for the outcome of the transaction. 

Removing human input from the purchase order process eliminates the risk of human errors, increases the speed of processing payments, and is a time-saving practice that can offer your employees the chance to concentrate on more demanding tasks. On top of this, your business is also decreasing the chance of being a target of invoice fraud or vendor fraud.

So how can you avoid these errors and improve the PO process in correlation with some of the best practices in accounts payable and overall financial management? The solution is automation. Implementing purchase order automation in your organization can optimize all steps involved in the purchase order process workflow.

Accounting automation streamlines the purchase order process and therefore makes all information available and accessible at all times, for any unforeseen audits or future references. Purchase order automation eliminates the need to, for example, manually match purchase orders with the provided invoice, preventing invoice fraud and other errors.

But how does automating the purchase order process benefit your company? Keep reading to find out!

Benefits of Purchase Order Automation

As we mentioned earlier, automating your purchase order process can be of great help if you want to protect your business from fraudulent activities, while also improving efficiency in the workplace. Let’s take a look at some of the benefits that automation can offer you: 

• Reduction in human input: Purchase order automation allows you to minimize human input in the process and therefore enables your employees to concentrate on core operations.
• Fewer human errors: Reducing human input and automating the purchase order process leads to fewer chances of manual errors occurring, such as misspellings or mismatches between the invoice number and invoice amount.
• Improved speed and efficiency: Automation can significantly improve the productivity levels in your organization, by replacing manual data entry with automated data entry.
• Increased transparency: Automation helps against fraud, by performing a cross-reference check between invoices and original purchase orders. Standardizing your PO processing and defining the information requirements will add accountability and transparency to your purchase orders.

Simply being aware of the benefits of automation will sadly not bring value to your organization. Put this theory into practice and find out how you can improve your company’s workflow using Klippa’s software to automate your purchase order process.

Automate Your Purchase Order Processing with Klippa

There are lots of improvements that automation can bring to a company, such as reducing human input in the workflow or eliminating human errors. Unfortunately, not all software can offer your business these advantages in one go. Klippa DocHorizon however, can offer your business all these benefits, in just one platform. 

Klippa DocHorizon is an Intelligent Document Processing (IDP) solution powered by AI, that can help automate your purchase order process and upgrade all invoice and purchase order-related tasks in your organization. Using intelligent document processing, with the help of our OCR software, enables you to perform: 

Would you also like to automate your purchase order process or find out more about our PO processing solution? We would be happy to show you our product. Simply book a free demo down below or contact one of our experts for more information.