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April 2018

how does purchase order financing work

Purchase Order Financing: What is it and how it Works?

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When a buyer issues a purchase order to a seller and the latter accepts it, this document becomes a legally-binding agreement between the two parties. The problem here is that, the final customer gets a long payment terms to pay for the product, which can sometimes stretch for months, while at the same time, the buyer needs to pay the supplier. This means that the buyer has to have a substantial fund already, otherwise the PO will disrupt their cashflow.

There is a solution to this problem, however, and it is called purchase order financing. In this article, I will explain what PO financing is and how it works. Hopefully, this will give you a good idea if this is the right thing for your business or not.

What is Purchase Order Financing?

Purchase order financing or purchase order funding is an advanced payment that a bank or other financing organization issues to the buyer to help them pay their supplier for the goods. In other words, this is funding a buyer receives before sending the goods to the end customer and before it invoices them.

This type of financing is dependent on your past history with the suppliers and customers and your credit record. This is why it’s more suitable for already established companies like business-to-business (B2B) or business-to-government (BTG) than, for example, startups.

Another thing of note to remember about PO financing is that you can only receive it for finished goods and products, not for raw materials, parts and components.

How Does Purchase Order Financing Work?

I’ll explain the whole process of PO financing at greater length in a future article, but for now, I’d like to give you an example of how it works.

Let’s say your company sent a PO for $1000 worth of construction equipment. The supplier then charges you $800 for this equipment and asks you to pre-pay for them. Unfortunately, you don’t have this money on you (remember the two problems with purchase orders we talked about in the introduction of this article?).

So how to get around this? By using purchase order financing and having a financial institution pay the supplier in your name, until you get paid by the customer. With this money, you can repay the financing institution, thus completing the circle, but without causing damage to your cashflow.

How does this work?

  1. You issue a PO to the seller for X amount
  2. The seller asks for a prepayment
  3. Your company turns to a bank for purchase order financing
  4. The bank reviews your credit, company and the transaction to make sure you check all categories
  5. They then pay the supplier. Directly. The money doesn’t go to the buyer and then to from him to the supplier, but directly from the bank to the supplier
  6. Once the supplier receives the money, they manufacture the equipment and send it to the buyer
  7. The buyer next inspects the goods and sends them to the customer, which they then invoice themselves.

This is, of course, a very simplified explanation of how purchase order financing works. There’s a lot more involved here and the process also involves other parties, like the shipping company. Also, should the goods fail the inspection and the customer refuses to receive them (either for being damaged or for some other reason), then that is a whole other problem, which this article is too short to deal with. We can talk about it in the future.

Conclusion

Purchase order financing is an excellent way to protect your cashflow when using POs.  However, you need to have a good credit record and reputation. Have you ever used purchase order financing? How did it work out for you? Let us know in the comments and don’t forget to subscribe your email to receive important updates to our Purchase Order Plus software.

10 invoice types you need to know about

10 Important Invoice Types You Need to Learn About to Operate a Successful Business

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Every industry is different, some are fast-paced, while others require more time. Construction, for example, takes more time than retail and transporting offers a completely different service than healthcare. But all industries in the end depend on a successful business transaction and every such transaction requires a record called an invoice. But not all invoice types are the same.

Here are 10 invoice types you need to know about:

1. Standard Invoice

A standard invoice is the most common type of invoice you might encounter and can be used across several different industries, including retain and wholesale. It consists of the names and addresses of the buyer and seller, their contact details such as email or phone number, company names, purchased item, total cost and an invoice number, which is unique for every invoice.

2. Pro Forma Invoice

A pro forma invoice is not an invoice in the typical sense we think about it. Instead, a seller will send a pro forma invoice to the buyer before actually completing the work for him to inform him how much he is ought to pay before the goods or services are delivered. Because of their nature, a pro forma invoice can be altered during the course of the project. It is also often commonly referred to as a quote.

3. Progress Invoice

Some work may take several weeks or even months to complete. For instance, this is the case with the construction industry. In that case, the contractor uses this invoice type to bill the employer and show the work progress. In addition he also quotes the amount the employer needs to pay. This is important if the contractor needs to pay their workers and cover expenses over a prolonged period of time.

4. Recurring Invoice

A recurring invoice is used at the end of the month. For instance, you might use them when renting something, like a house or machine.

5. Commercial Invoice

When working with a foreign or overseas buyer, the seller will use this type of invoice which includes the name and addresses of the sender and the recipient, items sold, item cost, the tax payable amount, but also includes the country of origin, carrier ID number, harmonized code for individual items, invoice declaration and a signature of the person responsible for the transaction.

6. Utility Invoice

I bet you didn’t know but that electric bill or internet service bill you receive each month is also an invoice. There’s a slight difference between a utility invoice and other invoice types. This invoice includes a due date it needs to be paid before, penalty in case the bill is not paid by that date and a billing period (typically one month).

7. Timesheet Invoice

If your services are more intellectual than technical and you prefer a payment based on the time, then a timesheet is usually the perfect choice. This kind of invoice is typically used by lawyers, consultants, physiotherapists and other professionals offering intellectual services.

8. Pending Invoice

If the recipient pays only a part of the invoice, the seller will continue to send him this type of invoice until the full payment is made. For instance, if the buyer receives an invoice for $100 and he only pays $50, next time the seller will send a pending invoice for the remaining sum, or in this case, $50.

9. Final Invoice

A final invoice is basically a demand for payment. The seller sends it after the project is fully completed to inform the buyer about this. This kind of invoice includes the information and addresses of both the buyer and seller, a list of product and services provided, their individual and total cost, payment methods and a due date.

10. Past Due Invoice

For one reason or another, the recipient fails to pay the invoice by due date. Of course, this doesn’t exempt them from paying, which is why you need to use a past due invoice to remind them of their obligation. This kind of invoice should contain all the information the original invoice had, but also any late fees and penalties that the customer now needs to pay for being late.

Conclusion

These were just 10 most common invoice types you might encounter and use in your business. There are, of course, many more, depending on your industry. Let us know if we forgot to mention any important invoice types and don’t forget to subscribe for Purchase Order Plus to easily create, approve and send purchase orders via mobile devices.

Purchase order vs contract differences

Purchase Order vs Contract: What is the Difference?

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Sometimes, it’s easy to get confused when working with purchase orders. For instance, we already talked about what makes them different from invoices, but that’s only one document. What about some other that you’ll be using in the course of a procurement and purchasing process? One important document that you shouldn’t mix up with POs is a contract you sign with the supplier. But what exactly is the difference between a purchase order vs contract?

Read this post to find out.

What is  a Purchase Order and What is a Contract?

To better understand the difference between a purchase order vs contract, you need to know what each of them are and what they are used for.

A purchase order is a document, today usually in electronic form, although paper is still used sometimes (though not recommended if it can be avoided) that you send as a buyer to the vendor to order a product or material that you need.

A PO usually includes:

  1. Buyer’s information (name, address and contact)
  2. Seller’s information (name, address and contact)
  3. Date when the PO is issued
  4. Details of goods such as description and quantity
  5. The amount of money the buyer is due for these goods
  6. A purchase order number
  7. Terms and conditions
  8. A signature of the person (purchase manager or procurement officer) responsible for authorizing the purchase order.

Once accepted by the seller, the purchase order becomes a legally binding document that both parties (buyer and seller) must follow to the letter.

And there lies all the confusion. At one point, the PO becomes legally binding, but only when it is accepted by the seller. On the other hand, a contract is legally binding from day one.

The difference, you see, is small, but it’s there. We just need to dig a bit deeper to reveal it.

How Purchase Order vs Contract Would Stand in Court?

So what about the legal value of purchase order vs contract? How would each of them stand in court? What probably confuses many here is when the PO becomes legally binding. As we already established, that only happens when the PO is accepted by the seller and not before. Until then, the PO is actually a commercial document. This means it has no legal value until that point.

A contract, on the other hand, is legally binding from the start and as such will hold much better in court.

A Contract is More Specific

Although PO and contract include much of the same information, the latter is more specific and goes into more detail. This is especially important for terms and conditions.

For instance, you should use contacts to define things like scope of work (SoW) and when there are more complex terms related to the purchase than is written in the PO.

They are Used for Different Things

Finally, a purchase order and a contract are, after all, used for different things. Normally, you would use a PO to order and purchase and item, while the contract is mostly used to pay for a service rendered.

This means you should think carefully and consider your business needs before making a decision which document, purchase order vs contract, to use when.

Concluion

Although similar, purchase order vs contract have clear differences in how they’re used, whether they are legally binding, what they’re used for and more. To ensure your business runs smoothly, you should know these difference and I hope this post helped you in that matter.

Do you have any questions or comments about purchase order vs contract differences? Let us know in the comments below and don’t forget to sign up for early access to Purchase Order Plus, a addon software for Xero that allows you to create, approve and send POs on any device.

Procurement and cybersecurity what you need to know

Procurement and Cybersecurity – What Procurement Managers Need to Keep an Eye on to Protect Their Company Customers and Suppliers

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In May 2017, more than 200,000 victims in 150 countries saw first-hand why cyber-terrorism is a real thing when their respective computers were held to ransom by cyber attackers after successfully infecting them with WannaCry ransomware. The attack didn’t spare neither individual computer owners, nor organizations, as both were equally at risk, with even FedEx succumbing to it. And, although there were cyber attacks before WannaCry and there will be after it (see Petya ransomware), it seems that, in a way, we have to give a special thanks to WannaCry (as crazy as that sounds) for finally opening our eyes to the cyber dangers out there. In this article, we will look at the connection between procurement and cybersecurity and why big data in particular necessitates that procurement professionals pay more attention to cyber threats themselves, instead of simply relying on the IT department.

Procurement and Cybersecurity- a Call for Procurement Managers

One area where this may be evident more than in many others is procurement, especially as procurement managers turn more and more to big data. While procurement does benefit tremendously from big data analytics, which helps it forecast market trends and determine risk factors and in doing so lower risks, this on the other hand makes procurement more at risk from cyber threats. And once cyber attackers gain a foothold from procurement, the entire company, its customers, suppliers and partners are also at risk. For this reason, procurement professionals need to realize the delicate connection between procurement and cybersecurity and work to strengthen that relation. Now, perhaps more than ever before. Why procurement managers should care? To cite CIPS:

Procurement professionals should care because a cyber attack could breach invoicing and purchase order systems, allowing the attack to control spending and disrupt business, which could cost money to recover from.

What do Cyber Attackers Want from Procurement?

Procurement is a logical target for hackers if you look at it. There are not many departments in an organization with the amount of information as valuable as procurement. With this information at their disposal, hackers can steal company or customer money, steal their identity for further illegal gain and do harm in many other ways. This includes, for instance:

  1. Company information (contracts with customers or suppliers, confidential documents…)
  2. Payment information (invoices, bank account numbers and other details, credit card information…)
  3. Personal information (customer or employee contact information, social security numbers…)

But, that is only the part of the problem, the more immediate one. Cyber attacks can also have a more long-term consequence for companies affected by them including loss of reputation, losing customers, suppliers and partners, intellectual theft and, of course, loss of revenue.

Cyber Security Starts with the Individual

Although cyber attackers are every year finding new and more cunning ways to get into our computers, the alarming fact is that they most often do manage to do what they do because someone lets them. In a way, hackers have mastered the art of human manipulation and are especially preying on human naivety. Most data security breaches don’t happen because of any special ingenuity on the part of hackers, but because someone clicked a wrong link or attachment in their email, gave their personal information where they shouldn’t or inserted an USB without knowing what’s on it. So, if you can get yourself and your employees (in procurement and anywhere else) to stop doing these things, you’ve already made a huge step in keeping your business, clients and partners safe from cyber threats.

Conclusion

Procurement and cybersecurity today need to go hand-in-hand more than ever before. Because cyber threats lurk at every corner, procurement professionals need to be especially aware of them and the dangers they posses. Do you agree? What more would you add to our conversation about procurement and cybersecurity? Let us know in the comments below and don’t forget to subscribe for Purchase Order Plus software and receive updates for it.