How Purchase Orders Help SMBs Manage Inventory & Cash Flow

Every business, big or small, needs to manage and monitor ordered materials, supplies and finished products in order to function smoothly. Each material you use to manufacture a product and each item you sell out comes from somewhere and stored somewhere. Here, tracking becomes vital and for this it’s necessary to manage inventory and accurately calculate stock turnover.

Small businesses tend to do everything manually from making their own purchases, building stock and investing a lot of their time and effort to make business a profitable success. However, when no process – from buying raw materials to manufacturing and producing the finished items – is automated you cannot calculate anything.

You need absolute accuracy to manage your inventory and how much you have spent on it and what amount of money and time you need to consume for future orders. Purchase orders are exactly what you need to fulfill this gap and set the stage for seamless workflow and production optimization through process automation. The implementation of an ERP production management system is a time-saving step down the line.

What is PO?
A purchase order is a legally binding agreement between a supplier/manufacturer and a buyer. It basically contains all information related to the items to be purchased – what products a client agrees to buy, their prices and the terms of order fulfilment and delivery.

Buyers generate the PO with all specified terms of business transactions to be held between them and their suppliers. Large enterprises have a fully developed purchasing department that reports to their dedicated accounting department. But small businesses have to capitalize on an extremely efficient purchasing process for better control on inventory management and cash flow.

Digital forms are used to agree to the terms and conditions of any purchase order, containing all relevant information about the items a buyer wants to purchase and details a supplier needs for order fulfilment.

What PO includes?
Following are the basic elements included in a standard purchase order:

  • A unique purchase order number
  • Payment terms and billing address
  • Details about product delivery (date, address, etc.)
  • Cost per unit and discount options
  • Quantity of items to be purchased
  • Total amount of taxes on total cost

A purchase order may also contain customizable fields related to the supplier provided services.

Don’t confuse a purchase order (PO) with invoice. Both are entirely different. 

Buyers generate the purchase order, while invoice against that purchase order is created by the supplier and sent to the buyer. Suppliers receive PO from their buyers to authorize, process and complete the business transaction. Invoices work in reverse order, which means a transaction has already been done and now the supplier has issued an invoice to get the payment from the buyer.

Benefits of using custom purchase orders:
Purchase orders in any business, especially in manufacturing and production are used to create a sense of trust between the buyers and the suppliers – making the cash conversion cycle more efficient and helping suppliers in inventory management.

Here’s some attractive benefits small to medium business owners can leverage through purchase orders.

  • Well-managed and Improved cash flow
  • No more stressful accounting backlogs.
  • Avoid late processing and delayed payments
  • Real-time visibility into cash flow situation
  • Better understanding of inventory management

Bottom line:
Use an ERP system to manage your purchase orders and better understand your cash flow and inventory velocity, and get a competitive advantage to generate real profits.