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Reasons for a PO System PDF Print E-mail
Written by Cecilia Chee, Singapore   
Monday, 03 October 2011 18:09

 

 

Reasons for a Purchase Order System

 

A purchase order system in business requires that each purchase be documented and assigned a purchase order number before the purchase is made or paid for. In such systems, usually only a limited number of people can authorize a purchase. By using a purchase order number as authorization, anyone in the company can make a purchase after receiving authorization while private purchases using company funds are prevented. Most large companies use purchase orders, but there are benefits for small businesses as well.

Fraud Prevention

o    By requiring a valid purchase order, companies protect themselves from scams where people send out small bills when no work was done or materials ordered. In businesses where many employees must make purchases, a purchase order ensures that everything purchased is for business reasons. This can be particularly important for companies that have large numbers of service workers in the field who often have to make spot purchases.

Cost Control

o    Companies that focus on a series of projects are particularly vulnerable to cost inflation. Construction companies, for example, project costs based on what they are at the time the project is launched. If prices rise during the course of the project, it will result in cost overruns or diminished profits. With an effective purchase order system, companies can often lock in the materials they need at a consistent price at the beginning of a project. If a supplier commits to a price, though, the company may be obligated to purchase the original quantity even if the need changes.

Cost Verification

o    There is often a week or even 30 days between the time of a purchase and the receipt of a bill. A purchase order allows you to quickly confirm that the price you are being billed is the price you were quoted. It also prevents honest disputes about what price was quoted, as the purchase order on both ends contains the agreed-upon price.

Control Purchases

o    When only a few people can authorize purchases even though many in the company request purchases, it allows those in charge to keep an accurate picture of where the company's money is going. This allows them to slow purchases in a particular area or to get discounts for buying in bulk on things they see are frequently being bought in the field. It also allows those in charge to keep people in the field from making unnecessary convenience purchases of items that are already in stock.

Track Vendors

o    Purchase order systems make it easy for those in charge to keep track of their relationship with various suppliers. If a vendor consistently delivers defective products, having a permanent record of where those products came from will give early warning of the problem. It also helps track shipping delays and other problems with particular vendors. Conversely, a good analysis of purchases every quarter will show which vendors consistently deliver quality merchandise in a timely manner.

Last Updated on Monday, 03 October 2011 19:39
 
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