Elements of a Purchase Order

Elements of a Purchase Order

You’ve just been appointed as a buyer for your organization and at it seems pretty simple, right? After all, you buy things for your home and family every day, how difficult can it be? But how many times have you actually solicited competitive prices for those items? How many times have you compared specifications, negotiated finance terms, or arrange for special deliveries, and all to please another person? Does it still sound easy? Maybe not, but a little knowledge goes a long way toward making buying easier.

There are many variations of a Purchase order. The following are the elements of a typical Purchase Order:

Item Description: Generally, what you order is what you get. Therefore, it is critical that the item description on the purchase order clearly identifies the item requisitioned by the ordering department OR the item which was offered and accepted as a result of a bid. If the item description has been altered as a result of bidding, or for other reasons, care should be taken to ensure that the new description is used and that the old item description on the requisition is not transferred to the purchase order.

Quantity and Unit: This may seem simple, but actually a lot of mistaken orders are received as a result of incorrect quantities and units. First, determine how many actual pieces of an item are needed. Then determine the lot size (100 per box, 10 per package, etc.) Divide the pieces needed by the lot size, and voila, you have a correct quantity. When in doubt as to the actual quantity needed, check with the ordering department. Quite often, the user will order 100 of an item that comes packaged in lots of more than one. They really don’t want 100 packages; they want 100 pieces. When in doubt, check it out! Also, be sure the purchase order reflects the correct unit which will be “each,” “package,” “box,” etc.

Price: Again, a seemingly simple element. Beware! Is the price quoted price per piece, per package, per ton, etc.? Does the price include shipping and handling? For what period of time is the price firm, 10 days, 30 days, 90 days? (By law, a buyer cannot hold a seller to a firm price for more than 90 days prior to placing an order.)

Freight & Handling Charges: If the buyer agrees to pay freight and handling charges she should require the seller to pre-pay the freight charges and add them to the invoice. This is referred to as “pre-pay and add.” If the freight charges are not pre-paid, the order will arrive collect and the buyer will be expected to pay the freight company upon receipt of the goods. Most purchasing/receiving departments are not equipped to pay the freight company. Therefore, when the buyer agrees to pay freight she should stipulate that it will be on condition that the seller pre-pays it and adds it to the invoice.

Delivery Date: The shipment must arrive on or before this date (unless the buyer specifies that the shipment must arrive exactly on the date shown.) When negotiating the price, the buyer should notify the seller of the date when delivery is expected. Sometimes the length of time allowed (lead time) can affect the price, i.e. rush deliveries may increase the price. Conversely, deliveries which are not needed urgently and which can be made within the seller’s normal delivery schedule may result in a decreased price. If the buyer agrees to an increased price for a “rush delivery” it is a good idea to negotiate a “normal delivery” price with a separate rush charge as opposed to negotiating a higher fixed price with the rush charge included. This allows the buyer to deduct the rush charge if the delivery does not arrive by the delivery date specified.

Delivery Location: This may seem obvious but many times an ordering department will be located in one place and require delivery in another. If this is the case, the buyer should ask the ordering department if there will be anyone on hand to receive the delivery or if any special equipment (such as a forklift) will be available for off-loading should it be necessary. Also, the delivery hours and phone number of the special location should be noted on the purchase order.

Sales Tax on Goods: Each agency must follow the sales tax laws of the state in which it is located.

Sales Tax on Freight: Each agency must follow the sales tax laws of the state in which it is located. Typically, if the goods are delivered by a common carrier no tax is due, and if they are delivered by the vendor’s truck the vendor’s tax rate is paid to the vendor.

Payment Terms: Payment terms are a much-overlooked element that can be used by the buyer to save his agency money. “Payment terms” indicate when the seller expects payment and whether or not she will give the buyer a discount for early payment. Here are the basic payment terms:

Net 30: Payment is due within 30 days of invoice date.

<2%-30: If payment is made within 30 days of invoice date, the buyer may deduct 2% from the total invoice (unless otherwise specified.)

2%-10th Prox: If payment is made by the 10th of the month following the invoice date, the buyer may deduct 2% from the total invoice (unless otherwise specified).

Sometimes vendors will allow more or less than 2% but the calculations are made as shown above. Payment terms should be negotiated with the seller at the time the price is negotiated. Sellers who are not willing to reduce their price are often willing to extend payment terms. It is important to coordinate the payment of terms with the buyer’s Finance Department and ordering departments. For instance, if the Finance Department takes payment discounts that are not earned the buyer will soon lose credibility with her vendors and they will not be willing to extend favorable early payment discounts to her agency. Also, if the using departments are responsible for processing invoices for payment it is important that they understand that payment discounts will be lost if they do not process the invoices in a timely manner.