How do Purchase Orders Work for Small Businesses? Your Full guide

As a South African SME, managing your finances is crucial to your success. In this guide, we will dive into the basics of purchase orders and how they work.
How do Purchase Orders Work for Small Businesses?
Ashleigh B.
Marketing Wiz-Guru

As a small business owner in South Africa, managing your finances and keeping track of your expenses is crucial to your success. One essential tool for efficient purchasing and inventory management is a purchase order. In this guide, we will dive into the basics of purchase orders and how they work in the South African business context.

In this guide, we’ll cover some of the following:

Purchase Order Takeaways

What is a Purchase Order?

A purchase order (PO) is a legally binding document that a buyer sends to a seller to request goods or services. Much like an e-commerce “cart” it outlines the details of the proposed purchase, it usually includes the description, quantity, price, and terms and conditions of the transaction. The PO serves as a formal agreement between the buyer and seller and helps establish clear expectations for both parties. By submitting the order, the buyer is committing to purchasing the goods or services agreed upon at that certain amount. The purchase order acts as insurance against non-payment.  

How do Purchase Orders Work?

Purchase orders are a great way for small businesses to purchase goods in bulk. When a business places a purchase order, the supplier will inform them whether they have sufficient inventory to fulfil it, if not they will need to manufacture or procure the goods. Once it’s accepted, the items will be delivered on the agreed due date and an invoice for said items sent by the seller. Additionally, buyers may opt to create special orders for extra-large orders or recurring sales — called either standing purchase orders or blanket purchase orders. The latter can also offer discounts or other incentives with strong customer-vendor relationships.

How do Purchase Orders work?

6 reasons why Purchase Orders are important for Small Businesses in South Africa?

Small businesses in South Africa can often lose track of their purchases, and this can serve as a great way for both buyers and sellers to keep track of these orders. Here are 6 reasons why small businesses in South Africa should use purchase orders:  

1. Streamline Purchasing Process

Using purchase orders helps to standardize and streamline your purchasing process. It ensures that all purchases go through a formal approval process, preventing unauthorized purchases and reducing the risk of fraud.

2. Record Keeping

Purchase orders provide a written record of all purchases, which can help with tracking expenses, budgeting, and financial reporting. They also serve as evidence in case of disputes or audits.

3. Vendor Management

Purchase orders allow you to specify the terms and conditions of the purchase, such as delivery dates, payment terms, and warranties. This helps in managing vendor relationships and ensures that both parties are on the same page.

4. Inventory Management

Purchase orders can help you manage your inventory by providing visibility into upcoming deliveries and ensuring that you have adequate stock levels to meet customer demand.

5. Legal Protection

Purchase orders can serve as legal documents that protect your business in case of disputes or discrepancies with the supplier. They provide a written record of the agreed-upon terms, which can be used as evidence in case of legal action.

6. Used for business finance

Due to the nature of a purchase order (a legally binding document), it can be used as leverage when trying to secure a business loan, especially for sellers and third-party manufacturers who don’t have the funds right now to fulfil the order. A purchase order loan is the ideal solution to fulfil an order from a buyer and still get paid.  

How to Create a Purchase Order?

10 steps to create a purchase order

Creating a purchase order is a straightforward process. Here are the key steps:  

Purchase orders (POs) are a common procurement document used by businesses, including small businesses, to formalize their intent to purchase goods or services from suppliers. Here's how purchase orders typically work for small businesses:

1. Creation of Purchase Order

The procurement process starts with the small business owner or an authorized employee creating a purchase order. This can be done manually using a template or through electronic means such as using procurement software or online platforms.

2. Details on Purchase Order

The purchase order includes details such as the name and contact information of the buyer (the small business), the name and contact information of the supplier, a unique PO number, the description and quantity of goods or services to be purchased, the agreed-upon price or rate, delivery terms, payment terms, and any other relevant terms and conditions.  

3. Review and Approval

The purchase order is reviewed and approved by the appropriate personnel within the small business, such as a procurement manager or an authorized approver, to ensure that it aligns with the business's procurement policies, budget, and requirements. Once approved, the purchase order is sent to the supplier.

4. Sending Purchase Order to Supplier

The approved purchase order is sent to the supplier through various means, such as email, fax, or electronic procurement platforms. It serves as an official request for the supplier to provide the goods or services listed in the purchase order.

5. Supplier Confirmation

The supplier reviews the purchase order and may send a confirmation acknowledging receipt and acceptance of the order, or request changes if needed. This confirmation helps ensure that both parties are in agreement and have a clear understanding of the order.

6. Fulfilment of Order

The supplier prepares and delivers the goods or services as specified in the purchase order. The small business may track the order's status to ensure timely delivery and receipt of the goods or services.

7. Receipt and Inspection

Upon receiving the goods or services, the small business should inspect them to ensure they meet the specifications and quality as per the purchase order. Any discrepancies or issues should be reported to the supplier promptly.

8. Invoice and Payment

Once the goods or services are received and accepted, the supplier sends an invoice to the small business for payment. The small business verifies the invoice against the purchase order and other relevant documents before making payment to the supplier within the agreed-upon payment terms.

9. Record-Keeping

It is essential for small businesses to maintain proper records of purchase orders, supplier confirmations, invoices, and other procurement documents for record-keeping, financial, and audit purposes.

Purchase orders are an important tool in the procurement process for small businesses, as they help formalize the purchasing process, establish clear expectations, facilitate communication with suppliers, and provide a documented trail of procurement activities.  

Key Tips for Managing Purchase Orders in South Africa

Purchase Orders can be quite tricky to understand, that’s why it’s so important for businesses to familiarise themselves with the regulations and required documentation needed. Here are 3 key tips for managing your purchase orders:

Understand Local Regulations

Familiarize yourself with local laws and regulations related to purchasing, including tax requirements, import/export regulations, and compliance with the Companies Act.

Maintain Proper Documentation

Keep copies of all your purchase orders, delivery notes, and invoices for your records. These documents are important for financial reporting and can be used as evidence in case of disputes or audits.

Communicate Clearly with Suppliers

Establish clear communication channels with your suppliers and ensure that they understand the terms and conditions of the purchase order. This includes delivery dates, payment terms.  

What are the benefits of electronic purchase orders?  

As a small business owner in South Africa, there are several benefits to using electronic purchase orders (ePOs) in your procurement processes. Some of the key advantages of using ePOs for small business owners in South Africa include:

Improved Efficiency

ePOs automate the procurement process, reducing the need for manual paperwork and streamlining the purchasing process. This can save time and effort for small business owners by eliminating the need for physical paperwork, manual data entry, and manual tracking of orders. It also reduces the chances of errors in the procurement process, leading to improved accuracy and efficiency.  

Cost Savings

ePOs can help small business owners in South Africa save costs associated with printing, storage, and postage of physical purchase orders. It can also help to prevent over-ordering or duplicate orders, resulting in cost savings for the business. Additionally, ePOs can enable better visibility into procurement data, allowing businesses to negotiate better deals with suppliers and make more informed purchasing decisions, leading to potential cost savings.

Enhanced Supplier Management

ePOs provide a streamlined and organized way of managing supplier information, contracts, and orders. Small business owners can easily access and track their orders, invoices, and payments, helping them to better manage their supplier relationships. It also allows for better communication and collaboration with suppliers, leading to improved supplier management and potentially better pricing and terms.  

Increased Accuracy and Compliance

ePOs reduce the chances of human errors associated with manual procurement processes, such as data entry errors or misplaced purchase orders. This can help small business owners ensure that their procurement processes are accurate and compliant with internal policies and external regulations. It also helps with audit trails and record-keeping, which can be beneficial for regulatory compliance purposes.

Better Visibility and Reporting

ePOs provide real-time visibility into procurement data, allowing small business owners to have a better understanding of their procurement activities, such as spending patterns, order status, and supplier performance. This can help with better reporting and analysis, leading to data-driven decision-making and improved procurement strategies.

Increased Productivity

By automating the procurement process, ePOs can free up time for small business owners to focus on other critical aspects of their business, such as sales, marketing, and customer service. This can result in increased overall productivity and business growth.

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

A purchase order and an invoice are two different documents used in the procurement process, and they serve completely different purposes. A purchase order is a document issued by the buyer (such as a small business) to the supplier, formally requesting the purchase of goods or services. It serves as a contractual agreement between the buyer and the supplier, outlining the specific goods or services to be provided, their quantities, and agreed-upon terms. It is typically generated by the buyer before the goods or services are delivered, and it serves as a formal authorization for the supplier to provide the requested goods or services.  

Whereas an Invoice is a document issued by the supplier to the buyer, requesting payment for goods or services provided. It serves as a request for payment and provides a summary of the goods or services provided by the supplier. It is typically generated by the supplier after the goods or services are delivered or completed. It serves as a billing document and includes the total amount due for the goods or services provided by the supplier, including any applicable taxes or fees.

What does a purchase order look like?  

A purchase order needs to be legally binding so there are certain items that have to be present on the document for it to be valid. These will include things like company name, address, PO number, shipping address, order details and totals. Here is an example template of a purchase order:

* this template is for example purposes only and is not an exact depiction of a purchase order

How does purchase order financing work?

How does purchase order funding work

Purchase order finance bridges the gap between order and payment and has the advantage of being faster and easier to obtain than a traditional bank loan. A purchase order loan is based on the creditworthiness of your buyer (customer) and your business.

  • Is designed specifically to help wholesalers and distributors who resell products to commercial customers
  • Is used by companies who need funds to pay suppliers
  • Helps companies grow past their financial limitations

Businesses in South Africa often face problems when they try to secure large orders from new customers. Competing for new business is a difficult process in itself since customers are constantly looking for the lowest price. Another challenge is getting the capital to buy supplies or products to deliver on the new orders.

Your SME (Small to Medium Enterprise) may be in a position where it is not able to fulfil a customer’s order because it does not have the materials in stock or the cash to acquire them. When this happens, the business risks losing both the order and the customer. That’s where purchase order finance can help.  

Purchase order funding (otherwise known as Tender Finance) in South Africa has become a popular way to finance a company that has received a large purchase order from a customer. This is one step before the invoice is generated.

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