What is a Purchase Order Number and How to Use It

There’s an old saying, “nothing is sure but death and taxes.” For businesses, we might instead say, “nothing is sure but bills and taxes.” Strictly speaking, businesses don’t die: they go bankrupt or out of business. However, they can last multiple lifetimes, even centuries, if well-managed. One of the keys to longevity for businesses is healthy cash flow, including the careful tracking of expenses and revenues. In addition, they still need to keep the tax man happy.

How do businesses weather these storms and keep track of finances? Every business needs records, but some firms do this better than others. Part of the process is the issuance of purchase orders or the use of bank ledgers to track expenses. Let’s look at how a purchase order number can help with routine accounting and tax preparation, along with other functions like visible supply chain fulfillment.

What is a purchase order number?

Simply stated, a purchase order number is an alphanumeric code that identifies each purchase order. Sometimes the code is all numbers, and sometimes it also includes letters. Each number is unique within a company, and it tracks a purchase from an agreement with a supplier to delivery.

Note how purchase order numbers track and differentiate purchase orders themselves. A purchase order is a type of contract that agrees to pay a supplier a certain amount of money in exchange for goods and services. It gives all the terms of the sale, such as the number and quantity of goods, where to deliver goods or provide services, and where to send an invoice. For most companies purchase order creation is part of their purchasing software.

The other important point about purchase orders is that they are legally binding contracts. While a lot of us in business think of contracts as a long sheet of legal language and fine print, this doesn’t always have to be the case. In fact, long contracts are inconvenient for many purchases, such as a case of copy paper or a palette of aluminum sheeting. On the other hand, financial services or rental contracts will be old-school.

How do businesses determine the purchase order number?

For a purchase order to be useful for more than a bare-bones agreement, there needs to be a purchase order number. We see this principle in action even with credit card and other sales receipts at a bricks and mortar store: each receipt will have a number and, in some cases, a transaction number for credit or debit cards. Later, the store can use these numbers to reconcile inventory, cash in the drawer, and other factors.

Purchase orders are different, in that you issue them before the goods and services are delivered, and store receipts are issued when money changes hands. However, the principle is similar, in that they track money.

With a traditional purchase order, most businesses will use purchasing software or an accounting program to issue it. Likewise, each purchase order number is unique. But how do businesses decide what numbers to use?

There are several purchase order number assignment methods:

• Sequential numbering: Simply start with 001, which represents your first purchase, then 002, and so forth. In several years, you’ll have a purchase order number in the thousands.
• Random numbering: Your purchasing software will assign a random number for each PO. These numbers don’t mean anything, because they’re random, but you’ll never use the same number twice. Sometimes the software will include letters.
• Year designation: A purchase order number begins with the year, then a sequential number. This way, accounting software can easily recognize which purchase orders represent an expense for a given calendar year.
• Vender designation: Usually these are a set of letters that indicate a particular vendor, followed by a number. You might also see a PO number having the vendor designation, then a year, then a number.

As you can see, there’s no “one size fits all” approach to assigning a purchase order number. Rather, businesses assign these numbers in part based on how they want to track expenses and vendor performance.

How do businesses use purchase order numbers?

Generally speaking, a purchase order number is an internal code. Some vendors include a PO number on their invoice to help accounting at the client company match the two documents. This way, they can get paid faster and more accurately. And, at the same time, they can use a PO to facilitate visible supply chain fulfillment as a reference that’s used for convenience. Client companies use purchase order numbers differently.

For supply chain tracking

A business can use a purchase order number to track their supply chain. This is especially common where a company uses the vendor code numbering method, because it lets managers see which vendor supplies a product at a glance. Then, if there’s a problem like shipping snarls in a vendor’s location, the customer company can pivot and temporarily replace the supplier. Modern purchasing software also makes this process easier.

To expedite accounts payable

Just as a supplier might use a purchase order number to identify where to send each parcel of goods, it’s also a good way to track invoices. This is one reason why suppliers will often put the PO number on their invoices. Then, Accounts Payable will be able to quickly issue a check or bank draft, and enter the expense accurately into the accounting software.

Tax and profitability determinations

Finally, all businesses pay taxes. On a business tax form, the accounting department has to indicate gross receipts for the company, and list expenses. With a PO number, especially if linked to an invoice, it’s easy to see what category of spend each item falls into. This way, you can classify everything properly for the tax man and calculate accurate income numbers.

Now that you understand what a purchase order number is, and how they’re used, it’s easy to see that these numbers are useful to almost any business. Best of all, modern purchasing software automatically generates these numbers based on the rubric assigned in advance. With everything organized, you can concentrate on more complex issues, like running your business.

Blog post provided by: CONTROL HUB: https://www.controlhub.com/