Why Purchase Orders are the Most Important Thing for Your Company

Get your executives, department heads or managers together and ask them what type of document a company needs first and foremost. While there may be varying opinions, everyone will agree that one document is crucial to all functions of a business, despite it getting little recognition for its contributions: purchase orders.

If not for the existence of a purchase order, you’d have little data about what items or services you’ve been selling. While this may not seem important now, purchase order history can determine how a company is performing and what it needs to change to streamline its processes. Here are a few more reasons why purchase orders are the keystone of a successful business.

Purchase Orders an essential source of information

If we were to trace the journey of a product from procurement to sales, the first essential document in the workflow is the purchase order. A purchase order is a binding contract between your company and the supplier that includes information not limited to the type of item, the quantity and agreed-upon price. No other documents can (or should) exist without this first form. A purchase order is also the first step in building your inventory and contains all the vital information you need to operate.

They can help determine size and scope

The price and quantity fields on a purchase order can provide clues about where to set your profit margins and how much you need to sell to be in the black. The size of your inventory as indicated on these sheets will also help determine what kind of space you need for your operation and how many workers are needed to support the company. In a nutshell, the information on these sheets will inform how you run the rest of your operation and whether or not you need to expand or contract your efforts.

They encourage careful consideration

By making purchase orders official through some sort of documentation, businesses can add formality to a necessary procedure. This can also prompt some sober second thought before you decide to sign on the dotted line. Could we find a cheaper supplier? Is this new product launch going to be successful? These are only a couple of questions that might come to mind when you’re preparing a purchase order and they will ensure that any decision you make is given adequate thought.

They consolidate all your costs

Through e-procurement, more detailed managers can use purchase orders to assess employee hours and wages as well as overhead (everything from lighting and heating costs to office supplies and furniture expenses) in order to find out the total costs that go into creating any product. That kind of information can provide answers to a lot of performance questions, such as how to improve efficiency and determine budget figures for the next fiscal period.

They identify performance issues

Let’s say your profits aren’t exactly where you want them to be. A perusal of all your purchase order forms can certainly provide you clues not only about your performance, but what you can do it improve it. You’ll be able to find out which products or services are selling well and which ones are gathering dust by noting the frequency of items ordered over time. Data concerning time lags in shipment can provide further insight into how time-sensitive or seasonal merchandise might have been affected. These are just two of the many clues your purchase orders can give you into your business’ operations.

Purchase Orders can help you anticipate trends

Navigating the economic seas is a tossup between smooth sailing and bouncing through some choppy waters, but purchase orders can help ensure your business is on the proper course regardless of the conditions. By graphing your procurement history, you can assess your company’s performance during boom and bust periods, identify product trends and examine market cycles. With such a detailed map, you’re more likely to navigate those uncharted waters ahead of your company with greater confidence.

Spreadsheets, financial statements and inbound materials are important in any business, but the root of all activity can be traced to the purchase order. It’s the one document that sparks all company activity and is the most useful document when assessing performance and anticipating trends. If a company’s destination is prosperity, a purchase order is the handiest road map a manager can use.