How Purchase Orders Work in Retail
If you have ever ordered product or supplies for your retail store, you might have been asked if you have a PO number. A purchase order (PO) is a written sales contract between the buyer and seller detailing the exact merchandise or services to be rendered from a single vendor. It will specify payment terms, delivery dates, item identification, quantities, shipping terms and all other obligations and conditions.
Purchase orders are generally preprinted, numbered documents generated by the retailer's financial management system. In other words, if you use an accounting software like QuickBooks, when you order products from a vendor, it will create a purchase order for you in the system. The purpose of the PO is to create a trackable document within your accounting or POS system to be used in all sorts of beneficial ways to run your business.
How It Works With an Inventory System
- A PO tells your inventory system what you have on order. If you are using an open to buy system, it knows not to order any more of a product because they are already some ordered.
- It can establish purchase specifics with the vendor. For example, it obviously contains the quantities of each product you are ordering, but it also details the method of payment, the terms of which you will pay for the products (including dating) and the method in which you want the products shipped to your store.
- Many vendors have a set or default system they use for billing and freight. So, without any instructions, they will default to UPS ground when shipping to you for example. But you may need it faster, and the PO can communicate that.
- A PO is an accountability document for all parties. It's very easy for mistakes to be made when ordering. But when everything is in writing, it's hard to argue. I can remember many times when I got billed and invoiced incorrectly from a vendor but had my purchase order to back it up and got it reversed or fixed.
- One example of this, I got an invoice for 300 boxes of shoe creme and when I ordered 300 pieces. There are 100 pieces in a box, so you can imagine how much higher the invoice was than what it was supposed to be.
- When the merchandise arrives from the vendor, you can check it in against the PO and make sure the shipment is correct. Fifth, it allows all of you employees to be involved. For example, one employee can order, and another one can receive.
- I remember my first retail store 26 years ago when we didn't have a PO system. Since I was the one who ordered, I also had to check everything in to make sure it was right. Not efficient use of my time as a store owner.
One of the other benefits of purchase orders is your creditworthiness. Banks will often look at your PO's to determine if you are solvent. A solid purchase order process can help you get approved. A poor one will result in you not getting a loan. It can also be used for credit with the vendor. For example, some vendors might require you to pay cash when you order. After a period of doing business with you, they may allow you to submit a PO versus a credit card. This is huge in managing your cash flow.
POs are a common practice in retail. And any POS or accounting software you might install into your store will have a PO component for you.