A purchase order is an official document in which your retail store commits to purchase goods from a vendor. It includes names of both the buyer and vendor, their company information, and the quantities of products being bought.
It’s tempting to order inventory in advance just in case you sell out. But businesses are sitting on $1.35 worth of inventory for every dollar in sales—a type of bloating that can happen for many reasons. One of them is losing track of orders you’ve made to suppliers, leaving you with high inventory levels and storage costs to match.
Using a purchase order system helps ease that problem. You’ll be better able to forecast and order future stock, improve cash flow, and prevent any order errors that arise throughout the order process. Here’s how to use them for your retail store.
What is a purchase order?
When using a purchase order (PO), your retail store is committing to buy products from a supplier or vendor. If your apparel store is sourcing 500 t-shirts from a manufacturer, for example, you’d send a PO to them. It’s your commitment to purchasing that quantity of stock from that vendor.
While it sounds like another unnecessary step in the ordering process, creating a PO for the goods you’re about to purchase helps track incoming inventory. Not only will you know which SKU quantities you’ve ordered from each vendor, but you’ll also be able to use your PO information to understand cash flow. The sum of your outstanding POs is money you’ve committed to pay to suppliers over the next few months.
The vendor also uses a PO to get things in place to be able to deliver the quality and quantity of goods ordered by the buyer on a specific date.
The difference between purchase orders and invoices
A purchase order is a legal document that shows you’re committed to paying a certain price in return for goods or services, based on the timescales agreed.
An invoice, on the other hand, is a separate document that follows the PO. It’s where the vendor officially requests payment for the goods or services outlined in the PO—usually when they’ve been completed, manufactured, or shipped.
This invoice contains payment details (such as the vendor’s bank information or link to pay via credit card), the purchase order number it relates to, and its due date (usually upon receipt or within 30 days).
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What does a purchase order look like?
What’s in a purchase order?
Every purchase order needs the following information:
- PO date
- PO number
- Delivery date
- Shipping method
- Buyer information (company name, email address, shipping address)
- Vendor information (company name, email address, and billing address)
- Items being ordered (SKU or item number, description, quantity of items, and price)
- The total price
- Tax information
Purchase order example
Here’s an example of what a PO might look like for a retail store. The document outlines the vendor’s information, the items being ordered, the quantities, and shipping terms.
Purchase order template
Need help creating your own PO? Use Shopify’s free purchase order template. Enter the required information—including your store address, vendor company information, and items ordered—to get an electronic purchase order sent directly to your email address, ready to forward to vendors.
How does a purchase order work?
Purchase order process
Thinking of using purchase orders at your retail store? Here’s what the PO process looks like.
- You decide to purchase new inventory.
- You draft a purchase order explaining the product you want to purchase, the quantity of them, the delivery date, and your budget.
- You send the PO to your ideal vendor.
- The vendor accepts to fulfill the order outlined in the PO (or cancels it if they’re unable to).
- The vendor creates a packing slip based on your purchase order details and fulfills the order by manufacturing and shipping it to your store. The PO number is listed on the shipping package so you know when it’s arrived.
- The vendor converts the PO into an invoice.
- You pay the vendor according to the payment terms detailed on their invoice.
Who issues purchase orders?
The buyer is responsible for issuing purchase orders. If you’re ordering inventory for your retail store, for example, it’s your job to create the PO. If you’re fulfilling an order for another business, it’s their job to issue a PO.
Depending on the size of your store, you might have a finance department, purchasing department, or accounts payable team who issues POs. If not, the business owner or store manager usually takes this responsibility.
Who approves purchase orders?
The vendor—be that a manufacturer, contractor, or otherwise—is responsible for approving purchase orders. If you’ve issued a PO for the inventory you’re ordering from a vendor, for example, it’s their job to approve it.
Once approved, the PO becomes a legally binding contract. You’re officially committed to pay that vendor for the goods outlined in the purchase order.
How to track purchase orders
There are various ways to track purchase orders. Excel spreadsheets are often the first choice for businesses just getting to grips with them. The only problem? They’re clunky, confusing, and get inaccurate fast—especially if you forget to update the spreadsheet once a PO has been issued, approved, or converted into an invoice.
Ditch the spreadsheets in favor of a PO management system. Apps like Stocky sync with your Shopify store so you can create and track POs from your back office.
Upload company information for each vendor you’re working with. When you need to create a new PO, select the vendor. Stocky will create a PO with its contact information prefilled. Just copy and paste the terms of the PO—the items being ordered, quantities, and delivery dates.
The best part? You’ll never get caught up and unknowingly overspend. See how much money you owe each vendor in real-time using the PO reporting dashboard.
💡 PRO TIP: Having trouble knowing how much stock to order from a vendor? Merchants using Shopify POS can use Stocky’s demand forecasting feature, which uses historical sales data to suggest which products and quantities to reorder.
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The benefits of using purchase orders
Track incoming orders
Inventory replenishment planning is tough, especially if you’re stocking large quantities of SKUs. “Did I forget to restock this product for next month?” might be a question swirling around in your head as you circle the shop floor.
Leave replenishment too late and you risk running out of bestselling stock. Do it too early and you’re left with too many products in storage. Both are costly mistakes.
💡 PRO TIP: To prevent stockouts, set reorder points in Shopify admin to get low stock notifications. These ensure you have enough lead time to replenish a product’s inventory before quantities reach zero.
However, using a purchase order system shows all upcoming orders, so you know exactly what expenses you’re paying out and which items you’ve ordered. Inside Stocky, the PO report details:
- The vendor you’ve sent a PO to
- The total cost
- The product(s) you’ve ordered
- When they’re expected to arrive
- Whether you’d paid the invoice a vendor provided
You can even set stock level restrictions for each vendor inside Stocky. If you try to create a PO for 80 items but your vendor has a minimum order requirement of 100, for example, the PO will be updated to reflect that. No back-and-forth delays needed.
Did your co-worker place the order for next month’s inventory? By implementing POs into your buying process, one look inside your PO system will show the answer—preventing you from buying the same merchandise twice.
Prevent order errors
If you’re making orders over the phone, it’s only a matter of time until something gets misinterpreted or misheard. A manufacturer thinks you ordered 90 t-shirts when, in fact, you’d said you needed 19. You get a gigantic order delivered to your store and an expensive invoice to follow.
According to Daniel Carter, SEO Manager of Skuuudle, “To precisely explain all the facts of purchase, purchase orders give a record of exactly what you ordered and at what price. This type of paperwork protects you from any ordering errors, such as someone misinterpreting an order done over the phone.
When there’s a disagreement regarding what was or should have been ordered, your team can refer to POs. Having this documentation gives you a valuable tool for resolving internal errors as well as issues that arise between you and your vendors.
As soon as a PO has been approved by a vendor, you’re legally obligated to pay them the amount detailed for the products included. While it might sound scary, it’s advantageous for the seller because you can order new merchandise without paying right away. Cash flow immediately gets better. You have a longer cycle to generate enough profit to pay for future stock.
The same legal protection applies to the vendors you’re sending POs to. They’re confident in delivering the products you’ve ordered for your store since they know an invoice and payment will follow.
Inventory management is a time consuming process. It’s also the activity that keeps your retail store afloat. No inventory equals nothing to sell, totalling $0 in revenue.
Purchase orders make inventory management processes more efficient. As part of your PO workflows, you’ll understand stock levels and track the costs of items you’re ordering from vendors. Patterns will appear over time.
Let’s say before you implement POs, you make an order of 200 units each month. Some months you sell out; others you’re stuck with a little longer. The new PO system shows existing inventory levels alongside your new order quantities. So, if you find you have 150 units left over from last month, change this month’s PO to 50 units. You’ll prevent bloating your inventory and accumulating large stock volumes that become increasingly harder to shift.
As a small retail business, ordering stock might not feel like much work. But if you plan to scale your product line as your customer base grows, POs make that process easier. The responsibility doesn’t fall on you to organize upcoming orders, prevent duplicates, and correct order errors.
Using purchase orders—and a system to organize them—gets your foundations right. Train new retail staff on how to use your purchase order form. Create automations to generate one when top performing stock dips below a certain level. In the future, hire a finance department who approves the POs and prevents overspending. It’ll make things easier in the long run.
Types of purchase orders
Standard or single-use purchase orders
A standard purchase order is the most common type of PO. They’re used for one-off purchases. If you’re ordering 500 pens from a vendor in preparation for a pop-up shop, for example, you’d use a single-use purchase order.
Planned purchase orders
A planned purchase order is created when you have repeat or regular orders with a vendor. Let’s say you plan to buy 1,200 units from a manufacturer, but instead of purchasing them all at once, they’re broken down into orders of 200 units for the next six months. You’d have six planned POs.
Blanket purchase orders
A blanket purchase order is the most vague type. It’s an agreement between a buyer and vendor to exchange goods in return for payment, but the specifics are to be confirmed. You might use a blanket PO with a trusted manufacturer.
Contract purchase orders
A contract purchase order isn’t necessarily an official PO; it doesn’t contain any specific information relating to products being purchased. It’s more a blanket agreement between a buyer and vendor that clarifies delivery, tax, and payment terms for any future orders. Another type of PO—be that a planned, single-use, or blanket PO—will follow.
Are purchase orders right for your retail store?
Purchase orders help retailers track incoming orders, commit to stock further in advance, and prevent order discrepancies. They also provide legal documentation should something go wrong in your supply chain process.
Determine the type of PO you need for your business, then use a purchase order system like Stocky to create them. It’ll make scaling your retail store easier and contribute to balanced inventory levels.
Article sources : https://www.shopify.com/retail/purchase-orders