July 6th, 2021You have so far used all of the suggestions learned from the pieces available here on Sourcing Nova. It is time to purchase your products. Great! However –
What is purchase?
The purchase definition and meaning in its basic terms means to buy a product or service. You have found the products, and you need to pay for them.
Unlike your purchases you make in a retail store, online or face-to-face, purchasing products from China in bulk is better served with a purchase order rather than a simple transfer or credit card. This piece is going to discuss everything you need to know about a purchase order – one of the most important legal documents you need when sourcing products from China.
What is a purchase order?
A purchase order, sometimes abbreviated at p.o., po or PO, is a legal document that you, the buyer, create, and present to the seller, in this case, Sourcing Nova. The purpose is to agree on the prices and delivery of products.
A purchase order allows buyers like yourself to make an order but not cover the payment immediately. The manufacturer is also protected because they can offer a line of credit without a serious risk. The document binds both parties equally.
Why you need to use purchase orders
There are some businesses who will not use purchase orders, chiefly because there is paperwork and additional steps necessary. These businesses are often well-established within circles and with manufacturers. You are a freshly started business and can get by without initially. However, as your business grows, so does your need for additional help and hands. Over time, the purchasing process leaves your direct control into the hands of others. Purchase orders keep your company from issues that arise from different hands in the order process.
The four types of purchase orders
It would make sense to believe there is only a single purchase order, but this is not the case. There are four types of purchase orders, and each one differs by the necessary information contained in each one.
Standard
The standard p.o. is the most commonly used. You have defined details and expectations on your products, MOQ, schedule and payments.
If you are selling a single product that you have refined well, you can have a single p.o. available for the manufacturer until you are ready to make some necessary changes.
Planned
A planned purchase order is when you make an estimate on your future requirements on your products. You include all of the information a standard purchase order except one of the elements listed.
For example, you may be sourcing grills from China, but you are not certain the absolute number you will want. You start with a few with plans to increase from there. You could also not have 100 percent of your e-store established and will need a bit more time. In this case, you can leave your delivery date open.
Contract purchase orders
These orders are often very defined with terms and conditions for all future purchases. This allows you to plan accordingly in terms of your needs.
The contract purchase order is the most legally binding of them all and often has several legal entities involved in its creation, negotiation and execution.
Blanket purchase orders
A blanket order means multiple orders of products that bring a discount. For example, if you are going to order a variety of wigs from a manufacturer, you may wish to combine combs with that order to bring your per item cost down.
Blanket purchase orders are also used when products are needed over a time. You may not be 100 percent sure of the total number of combs you will want for your e-store until you see how well your wigs move. Your blanket order can keep record and track of the amount you have used for wigs and can designate the difference towards combs.
P.O. Number
The purchase order is the official document used to order the products. Each individual purchase order will have, and absolutely should have, a specific, unique number assigned to that purchase order. This is the p.o. number and is vital for bookkeeping, tracking products and any other needs that may arise from purchasing your products from China.
The term is p.o. number, but the actual number can be a series of letters and numbers. This helps businesses generate individual numbers for their purchase orders. Both you and the manufacturer can easily track with this process.
Purchase order or invoice
You, as the buyer, create a purchase order. The manufacturer and its accounts department create the invoice. The invoice lets you know the total amount of your products purchased in addition to any specific terms of the purchase such as amounts and times payments are to be made.
The purchase order and invoice represent legally binding financial documents between you and the manufacturer. It makes sense, then, that these two things are often confused. The purchase order is necessary to create the invoice.
What are the advantages of using both
This is simple. Invoices help you track products and make business decisions. Most importantly, an invoice tracks your purchases and payments in the case of a dispute.
When to use a purchase order vs. an invoice
Like Sourcing Nova listed above, a purchase order is done before you order your products and given to the manufacturer. An invoice is done after you order your products and is given to you. Basically, the purchase order is the official contract. The invoice is the confirmation the contract is fulfilled.
The purchase order process
There are steps in a purchase order, and if you are not skilled in accounting or bookkeeping, it can be a bit overwhelming. However, the process can be broken down into easy to understand steps.
1. You make the determination to buy products. Larger businesses have a full department for this purpose. There is a document called a purchase requisition form that is often used. This helps create a paper trail in the case of problems.
2. The purchase order is created and details everything for the product order.
3. The purchase order is approved, if necessary.
4. The purchase order is sent to the manufacturer. The manufacturer decides on whether or not they can fulfill the terms of the purchase order. The response is sent back to you as a pro-forma invoice. If the pro-forma invoice is approved, the purchase order becomes a binding agreement.
5. You make the initial down payment on your products. The standard is a 30 percent down, although it can be higher. If you are a new customer, the down payment is likely greater.
6. The products are made in the factory by the manufacturer. When products are approximately 80 percent complete, Sourcing Nova will complete a pre-shipment inspection.
7. Notice is sent to you via email that remainder of balance is due. You send the payment of the balance amount to us. We make your payment on your behalf.
8. Products are forwarded to Chinese customs. We will handle all Chinese customs for you.
9. All documentation, including commercial invoice, Bill of Lading, packing list etc. are sent to you via FedEx, DHL or other service.
10. Products are shipped to you. Shipping by ocean will not have a tracking number but tracking via container. Expedited or air shipping will include a tracking number.
Purchase requisition
By now, you have a solid understanding of the definition of a purchase order. A requisition is common for larger businesses and not small ones like yours.
In a large business, a decision is made to order fresh product. A fully developed trail of information is necessary to track any discrepancies, and this is particularly important with a large business with a huge variety of products.
A purchase requisition is an official request for product within a business. Yours is a small business and will not need a requisition. However, if you expand and expand well, requisitions become absolutely necessary.
Purchase order templates
The beauty of the Internet is there are plenty of available documents. All you will need to do is add some basic, fundamental information to that document. There are plenty of purchase order templates online you can find and use for your specific business. Sourcing Nova uses this template for its new customers who are freshly starting into business and do not have their own purchase order form.
This is not necessary, as you can create your own purchase order using a word processor or spreadsheet program. Many businesses have software designed specifically for purchase orders. You can certainly elect to find software that will meet your needs.
Purchase order information
Each purchase order should have, at minimum, all of the following information:
The purchase order number
Your business name, address, email and contact
The manufacturer’s name, address, email and contact
The products wanted
All of the necessary details of the products
Shipping method and terms
Delivery date
Item quantity and per item cost
Line total
Total product cost
Necessary taxes
Total price for order
Payment terms
It is also a good idea to have your business name, address and contact information as well as a company logo on your purchase order form template.
The purchase order number
There are two ways to make a purchase order number – by hand and automatically. If you use purchase order software, the software will do it on your behalf.
Manual purchase order numbers
The easiest way to make a purchase order number is to use a system that you will understand and can easily access if necessary. It is best to use a series of letters, numbers and dashes when forming your order number.
Regardless, it should be a system where you can quickly access all of the information without lots of effort.
Always include the important information: manufacturer name, order details – dates, order, product arrival and payment.
Automatic purchase order numbers
Purchase order software will automatically generate and file purchase order numbers. You will not have to have a special recording system or other. The software will handle all of the details for you.
Purchase order software
It is understandable that you are a small business just starting out. However, keeping up with your purchases, invoicing and products are absolutely necessary for your business. The more physical paper you generate, the much more likely the chance of something vital being misplaced. Consider: You may reach a point where getting your products from China will require no less than seven separate documents: requisitions, purchase order, quote, order acknowledgement, products received notes, packing slips and the invoice. This is for one product order.
If you do not have this 100 percent under control with a flawless filing system that anyone can access, you are setting yourself up for trouble in every possible way. Here is a good rule of thumb: Can someone walk in off of the street with no clue on your business, and find a specific purchase order from three months prior using your purchase order system? If they cannot, you need to change and upgrade.
Purchase order software will handle all of your purchasing and billing needs along with other documents you may need on hand. Additionally, many systems back up into a cloud, so there is no worry if you lose your documentation locally.
Why use purchase orders at all
You may be thinking as a small business that you will not need to file purchase orders with your manufacturer. You are of the opinion simple is easier and cheaper, but you can upgrade later on. This is a bad decision on several levels. You will get confused because you will not be able to keep up with all of your information as your business grows. It is best to get ahead from the outset with your purchase order forms rather than wait.
There are five reasons why you need to use a purchase order form.
It is a legal document
You are ordering your products from a different country and have no direct contact with the country outside of your contact within Sourcing Nova. If you order 2,000 wigs and only 1,000 arrive, what can you do?
As long as you have a purchase order with documentation from the manufacturer, you are in good shape legally. You can go through channels to get the remainder of your product order or a refund.
It simplifies tracking
A purchase order helps you account for your products across the board from ordering to selling. If you have several outstanding product orders at a time, it is easy to track your products with your number.
Your purchase order can also make sure your products arrive on time and at the agreed on date. This means you can budget your money for the best profits.
Audits – they happen
If the IRS or tax agency decides to audit your business, they will need to see proof of your orders and ordering. Auditors can easily use your purchase orders and system software. The last thing you want in an audit is for auditors not to have quick and easy access to your bookkeeping. Bad things happen in this case.
The manufacturer has an easier job
Chinese manufacturers use purchase orders for products. Sourcing Nova will use your purchase order for the best shipping options and speed. There will be no misunderstanding in the purchase process with a purchase order.
No duplicates
If you have more than one product for sale in your e-store, you always stand a chance of ordering more than you need at any time. A purchase order can help you keep your products in proper order.
Are there times when a p.o. is not necessary
As a small business owner, every penny matters across the board. There is never going to be a time when a purchase order form is not necessary. Do not let yourself go without a purchase order. Sourcing Nova will not assist you without one.
Final thoughts
Sourcing Nova feels very strongly about you having a purchase order because of the volume of clients and manufacturers we work with on a daily basis. We can work with any purchase order form template. Just send us your specific form, and we can get started on the sourcing process. Let us know how we can help you.
