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A purchase order is a commercially used document that is used to list products or services being purchased and the price they are being purchased at. A purchase order is a legal offer from the seller to the buyer. It is the first step in creating a sales agreement or contract.
The purchase order should include as much information as possible in order to give the buyer the best idea of the services or products being offered. The seller will want to look over this order carefully, as once they move ahead with the purchase the order can be legally binding.
Most purchase orders are now completed and sent online. This makes it important to protect the order as needed. You will also need to decide how you will accept signatures for your document.
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All new entrepreneurs will, at some point during their business’ infancy, have the task of selecting and purchasing supplies . This is the where the famous purchase order comes in. But what is a purchase order? Below I’ve listed a few things a purchase order is, and the things it patently is not.
A purchase order is –
The first official proposal made by the buyer to the seller - In other words, it contains the agreed-upon terms of a purchase and acts as the first step of that purchase.
A legal document - Once a buyer has issued a purchase order, he or she is legally obligated to comply by its terms, provided that the seller does also.
A formal-looking document - Most companies have a standard purchase order that is used for every order placed, in the interest of saving time. I advise that you draw one up as soon as you’ve established your shipping address and regulations.
There are several ways you can go about creating your blank purchase order. Some entrepreneurs choose to have one professionally drawn up or to use purchase order software. This ensures a complete and official document, but paying an expert or buying purchase order software presents an extra expense. However, if you choose to create your blank purchase order freeform, you run the risk of arranging it in too unorthodox a way or forgetting important attributes. Your best bet is to find a free purchase order form via a reputable online source. A free purchase order form will contain all the necessary fields and look professional, while saving you time and money.
A purchase order is not –
The only document used in a sale – The purchase order is merely the first document of an official transaction. The buyer issues a purchase order to the seller, who receives and reviews it. The seller then fills the order and sends it to the buyer along with an invoice, which details the contents of the shipment. It is necessary for both parties to have copies of both documents, as it is allows shipping and receiving personnel to ensure the order has been filled correctly.
Always a physical document – Electronic purchase orders (EDI) are becoming more and more popular. In the EDI method, a buyer’s inventory system automatically generates an electronic purchase order when it detects a deficit in stock. This order is emailed to the vendor, whose system automatically places the order and sends an electronic invoice. For up and coming entrepreneurs, electronic purchase orders are not particularly advisable, as EDI systems tend to cost a lot of money. However, it can save you time and money down the line, and is an option worth remembering for when your business is thriving.
A purchase order template is one of the most important documents for a new entrepreneur to master. Once you’ve set up relationships with your vendors and gotten your business up and running, you’ll need to be able to place and record orders quickly and efficiently. A purchase order allows you to do this with little to no fuss or muss.
The exact layout of your purchase order will vary according to the type of business you run. However, there are a few main components in every purchase order. I’ve outlined these below.
Purchase Order Number, or “PO number” – This serves as a shorthand identifier for the order. You can store each purchase order in your company database under its PO number. It helps vendors, clients and packing/shipping personnel to keep track of the order and log it in the books. You can ascribe PO numbers to purchase orders chronologically - for example, the first order you place might be #00001, the 100 th might be #00100, and so on. If your business operates out of multiple sites, you should include some shorthand in the PO number to identify the site to which the order is shipped. For example, an order shipped to a Boston office might have the PO number #02987BOS, while an order shipped to a San Francisco office might be #34506SFR.
Delivery Details – This should include the following:
· Destination address – In other words, the exact address to which the order is being shipped. This may be different than the billing address.
· Name of recipient – The name of your company, along with any details the shipping people will need to know about the entity receiving the order, such as contact info for your shipping department.
· Name of the entity making the purchase - This is not necessarily the same as the contact recipient!
· Method of shipping – Generally the options here are air, land, or sea.
Billing Information – This includes the contact name and billing address of the person paying for the order. Note – The contact for the billing address may be different than the purchaser and/or recipient!
Order details – This part of a purchase order has the following components:
· A description of each item purchased – This can be in shorthand; for example, a pound of unsalted peanuts might be listed as “PNUTS U/S (1 lb)
· Quantity of each item ordered – This should be include the number of items ordered, not the weight or total quantity. For example, if you’re ordering 6 bags of 20 erasers, you would list the quantity as “6,” not “240.”
· Unit price and subtotal – In other words, how much item costs per unit and the grand total. For example, if a company were to purchase 17 boxes of pencils at $10 each, the unit price would be $10 and the subtotal would be $170.
· Miscellaneous added costs or discounts – These should be listed below the subtotal line and may include the cost of shipping, all applicable taxes and price adjustments such as frequent buyer discounts.
· Total – This is the final cost of the order, having taken taxes, shipping and price adjustments into account. It should be printed below all the other costs, clearly labeled “total” or “amount due” and printed in bold so that there can be no confusion.
The purchase order is one form you’ll use again and again throughout the life of your business. The purchase order works hand in hand with the invoice to document and verify purchases of materials, products and services. A PO is fairly simple in composition; it mainly contains shipping information, information about the buyer and the seller, and order details such as item name, price, and quantity. It allows you to check its details against the invoice and ensure your finances, inventory and vendor relations are in order.
Why do I need one?
Some business owners choose to ignore the importance of the purchase order template. This might not bring you much hassle when you’re just starting out – new entrepreneurs are as a rule starting small and communicating directly with vendors. However, as your business expands and you introduce more vendors and merchandise into your repertoire, the dealing can get dicey. It’s easy to lose track of income and output, and if you fall into relations with a shady vendor or disorganized representative, you’re left defenseless.
A PO is not a legal document until it has been accepted
By law, a purchase order must constitute an “offer” by one party and an “acceptance” by another in order to be considered a contract. Technically, a PO is the first official offer made in a transaction, and once it has been accepted, its terms must be adhered to no matter what. Keep this in mind when you are reviewing the terms of an offer or outlining your own!
Be specific when stating quantity
In the case of the sale of goods, many states do not consider a PO a binding contract unless it names a particular term of quantity. This can either be an exact quantity or a range, but it needs to be explicitly stated.
Have your signatures in order
Most states impose a minimum price point over which, in order to be binding, purchase orders must be signed and dated by both parties. Be sure to review your state’s official website for details.
How do I make one?
There are millions of shortcuts you can take when creating this fairly simple document. Some people use special purchase order software or download a free purchase order form off the internet. Others work from scratch, though if you’re new to entrepreneurship, often the best option is to download a sample purchase order and use it as a guideline. You want to be sure that all of your i’s are dotted and t’s are crossed, so to speak, when handling a legally binding document.