It’s critical to comprehend the legal ramifications of purchase orders. After all, you need to know your position if a customer refuses to pay an invoice or you get an invoice for double the amount mentioned on a purchase order (PO).
Is a PO legally enforceable? Are there any additional benefits to increasing POs outside the legal ramifications? Paul Barnes, MD of MAP, a digital creative agency’s outsourced finance division, shares his purchase order observations.
Purchase orders are legally binding agreements.
Once a PO has been accepted, it becomes a legally binding document. It is, in essence, a contract between a buyer and a seller. When you create a PO and deliver it to your client, you’re informing them that they have a legal duty to pay you the agreed-upon sum. As a customer, you should know that receiving a PO obligates you to pay the amount specified on the purchase order. If the amount is inaccurate, it must be challenged right away, and a new PO must be issued. If you don’t object to a PO when it’s issued, you’ll be in a bad legal situation.
As a result, POs are incredibly beneficial in the money collecting process since they guarantee a flawless transaction. After all, if the supplier has proof that a purchase order was received, the client will be unable to argue that they did not authorise the service or items.
What information must be included on a purchase order?
The process of drafting a PO is simple. All you have to do now is make sure that all important details are included. The date you issued the PO; the goods/services the client wishes to purchase from you; the kind and number of things bought; the agreed price; payment terms; delivery fees and information; and any other terms and conditions must all be included. A PO number should also be included, referenced on the invoice and in any interaction with the provider.
Advantages of POs
POs are crucial from a legal standpoint, but they also provide a variety of additional advantages that should not be overlooked. These are some of them:
POs offer significant spend control from the buyer’s standpoint, ensuring that no purchases are made outside the budget.
Easier reconciliation: The purchasing party may be comfortable that the purchase invoices received match the purchase orders’ ‘agreements.’ Errors and disagreements are more frequent without this degree of supervision. Payment processing may be sped up significantly when a supplier can match a purchase order and an invoice.
Outgoings may be anticipated early – Rather than waiting for the purchase invoice to be received into the accounting system, POs allow the buyer to forecast their outgoings at the earliest possible stage — when the purchase order is initially prepared and accepted.
Improved financial reporting – You may enhance your financial reporting since you will be less dependent on the supplier to issue an invoice for the expense to make it into month-end.’ You may get a far more realistic picture of your financial situation by accumulating outgoings based on purchase orders.
Process of placing a purchase order
So, what happens once you get a purchase order in your email? Processing a purchase order involves the following steps:
- Order is issued and sent to the company that will be purchasing the product once a price has been agreed upon.
- The PO is received by the buyer, who authorises it (it then becomes legally binding)
- The supplier is the one who provides the goods/services.
- The supplier sends an invoice with the PO number on it.
- The invoice and purchase order are matched.
- The invoice has been authorised and is being processed.
- The invoice is settled.
- The PO has been closed.
- Boost your chances of receiving payment
Purchase orders are an important part of paying, but they are just one part of the payment collection process. The invoice and your cash collection method both play a role in paying on time. To enhance your prospects of being paid promptly, do the following steps:
Ascertain that the invoice contains all the client needs. Include the PO number, a brief description of your product/service, and, if applicable, the name of the purchaser. So that the processing does not stop, ask your client if anything specific needs to be on the invoice.
“Any difficulties with this invoice being paid on time?” email the client a week or two before the invoice is due. This gives them a perfect chance to contest it before it’s due.
Make sure you have a consistent invoice chasing strategy in place to avoid any bills being substantially late. Because some clients pay late (and only after being badgered!), an automatic invoice chasing system is a wonderful investment.
For non-payment of an invoice, declare that you will charge a fixed fee and interest (The Late Collection of Commercial Debts (Interest) Act 1998) So long as your contract does not include any late payment clauses, this statutory law will take priority and may be enforced.
Know how to place a purchase order.
Purchase orders are necessary for a flawless transaction to take place. The seller and the customer must abide by this contract since it is legally enforceable once signed. POs are also important in other ways, such as ensuring that expenditures remain within budget and assisting with early forecasting and reporting. Since a small firm, it’s critical to develop the practice of seeking and raising POs, as payment disputes and cash flow concerns are significantly more probable without them.
