Tax & admin 4 November 2016

What is a PO number and why are they important?

purchase order
A PO number ensures that your invoice gets processed as quickly as possible

Getting paid on time is absolutely pivotal to the success of a small business and a purchase order (PO) number plays a significant role in that. Ormsby Street director Martin Campbell explains what they are.

When you first start a business, it can feel like there a million and one things that you need to learn. For many, getting their head around accounts can feel the most daunting.

For some reason, people feel a little intimidated by “number stuff”, and while there is the option of using an accountant, book-keeper or payroll firm for some of this, for most small business owners this is not affordable or realistic, particularly in the first few years.

So it’s a question of getting your head around some new skills and terminology. One such term to understand is the PO number.

What exactly is a PO number?

While some small businesses do not always bother with purchase order numbers, they should really be used by any company that sells products or needs to order parts and materials from another supplier.

A purchase order outlines to a vendor or supplier exactly what the purchaser needs, when they need it by, how much it is going to cost and when payment should be made.

It is prepared by the buyer, and can be done using simple cloud-based software, which help with tracking and digital submission of orders to the supplier, or can also be completed manually.

The purchase order should include a PO number, which should be a unique reference that enables the matching of shipments with purchases.

Why are PO numbers important?

In an ideal world, everyone would pay on time, and all orders would be exactly as they were intended. That’s not the case however, and payments can be missed and orders managed incorrectly.

A purchase order is a legally binding document between a supplier and a buyer. Or put another way, if you don’t have a purchase order, you don’t have an order from the customer.

Accepting a verbal order – particularly for services – is very common with small businesses, and many don’t know that the bigger businesses they are selling to not only have purchase order systems, but insist that they are used.

Thus if business is done without a purchase order, administration will likely be delayed in when your invoice is received and the finance team say “what’s this?”

Using a PO number ensures that your invoice gets processed as quickly as possible. Using a PO number also helps minimise the risk of incorrect payments by ensuring that deliveries and invoices have a corresponding reference number.

It also means that you have proof that goods and services were ordered. You can then subsequently compare ordered inventory to inventory shipped, and can also track when payments have been made on specific orders.

The PO number and cash flow

Most small business owners will baulk at more admin and paperwork, but the purchase order and number on it is vital to staying on top of cash-flow. Deploying a PO number system alongside good credit management policies can make a real difference to a small business.

Such policies should always include assessing your customers before you work with them, as to their payment history and credit score. If these do not give you confidence you will get paid on time, then full or partial payment upfront could be discussed.

If you are satisfied, then make sure you have a strong collections process in place. This should include invoicing on time, following up when payment is late and knowing the best course of action should you need to chase bad debt – a process for which a purchase order is essential.

Such actions are those of a smartly-run, professional business and the purchase order and PO number are important components of that. Small businesses should make an effort to deploy these right from the off.

Martin Campbell is managing director and co-founder of Ormsby Street.

Read our expert’s effective guide to tackling unpaid invoices

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