We don’t use Purchase Orders in our business because we’re too small… and it’s too much paperwork …. WRONG and WRONG!
We hear this regularly when we first start working with clients – but if you want to get serious about growing your business it’s critical that you put big business thinking and processes in place NOW!
Sure, it’s not possible to implement all of the systems that a larger business would have in play when you’re small to medium business, but there are some non-negotiables that are surprisingly easy to introduce and will provide a significant return on your invested time.
One of these processes is the use of Purchase Orders. If you aren’t using purchase orders, clear your calendar and find time to roll them out. The following article will go through the benefits of POs of how to implement them in your business.
What are Purchase orders?
Purchase orders are key items used at the beginning of the construction or renovation process, where they effectively lock in the critical elements of time, price, and the scope of work with trade and material suppliers.
When a supplier or a contractor sends through a quote for your project, you can lock the time, price, and scope by converting this to a purchase order. Both parties agree to all the elements in this document and eliminates any confusion about what was agreed to or when it was agreed.
The Benefits of using Purchase Orders – Not Just More Paperwork
There are many benefits to using purchase orders in your business, which can be felt across many aspects of your business.
- Improved Cash Flow – Purchase orders can help you plan and allocate expenses to projects with greater precision. Because costs are predetermined and locked in, you reduce the risk of unexpected or fluctuating expenses, which allows for improved budgeting and forecasting.
- Reduced Confusion and Friction – By locking in materials and subcontractor trades in advance, purchase orders Provide more certainty for everyone, reducing stressful and unproductive conversations when it comes to scope, price and timing of supply.
- Streamlined Bookkeeping – Purchase orders provide two critical links for your BK function. They allow a Bookkeeper to easily match the invoice to the specific job (critical for “Job Costing” or “Back Costing”), and they act as pre-authorisation for the Bookkeeper to pay any invoices that match the purchase order, without having to get approval from the project manager or business owner. Imagine how many phone calls and emails this will save you going backwards and forth with your BK!
- Risk Mitigation – Because purchase orders lock in costs, timeframes, and the scope of works, they reduce the risk of material substitution for lower quality product at the same price, costs blow outs due to unspecified work and extra tasks, and project delays. They also help to limit unauthorised spending, as the bookkeeping team are only able to pay invoices which match the purchase order.
- Professionalise – Purchase orders add professionalism and credibility to the transaction, improving the image and reputation of your business in the eyes of clients and suppliers. They show you are the real deal and that you have the capability to be a big player.
- Return on Investment – There’s a reason all the big players use purchase orders. They enable cost control, reduce errors, and improve efficiency across the business – ultimately leading to increased profits and the ability to grow. As an owner, they also provide a great return on your time and energy particularly as most of the investment is at the front of the project, with all of the benefits flowing throughout the project.
Ok, so there are many benefits to using purchase orders in your business, but how do you implement them?
Implementation – How to Make Purchase Orders Work For You
Putting purchase orders in place is actually pretty straight forward and most accounting and/or job costing or estimating platforms will have the process built in to convert a quote to a purchase order. The following steps are what we recommend when rolling out POs in your business:
- Start fresh with new projects – there’s no real benefit in trying to implement POs on projects already in flight
- Decide who will be responsible for setting up and issuing purchase orders. For maximum efficiency, and to align POs with other processes, for building and construction projects we recommend the person doing your estimating is usually the best person to issue purchase orders.
- Finalise your processes based on the platform you are using – which can sometimes mean setting up some templates. Our preferred option in the estimating space is Buildxact, and one of the main reasons we like this platform it is how easily POs flow on from the estimating process. Buildxact users: learn how to implement POs
- Training and education is the vital next step. All relevant members of the team need to be clear on the process, including those involved with ordering materials as part of any variations, as well as your bookkeeping or accounts person. It’s critical that you have a clear process with your bookkeeper on how invoices will be received when a PO is involved so that you can unlock the benefits of “job costing” or “back costing” (being able to see how your margin is traveling during a job rather than wait to the end)
- Finally, once you have purchase orders up and running you can start to unlock some vital reporting, like being able to see how far through you are on a project in terms of costs, what’s left to come down the pipe, and being able to quickly see if your suppliers are straying from agreed prices. Again, with a platform like Buildxact you can see some really useful reporting if you have POs in place. Most accounting platforms will also have reporting you can explore.
With an implementation that easy, what’s not to love?
As with all processes, there are a few limitations. But they can be easily mitigated.
What’s next?
Purchase orders elevate your business to the next level of professionalism and sophistication. There are a heap of great benefits, are easy to implement, and will allow your business to grow. There’s a reason all the big players use them.
If you’d like a hand working out where to go from here, give us a call on our free advice hotline and we can help you implement Purchase Orders and a range of other big business processes to help fuel your business growth.
