Are purchase orders legally binding?
May 11 2006
A purchase order is a legally binding document issued to a supplier for provision of goods or services. Implementing a purchase order system can be useful for both parties as it helps the customer minimise the risk of incorrect payments by ensuring that deliveries and invoices have a corresponding purchase order number, while suppliers have proof that goods and services were ordered.
When a customer won’t pay and simply ignores requests for payment, or makes endless promises to pay which are not kept, some final action becomes necessary and should be taken without delay. This includes appointing a collection agency, pursuing the debt through the County Court, or passing the debt to a solicitor.
Alongside a purchase order system, it is important that a company has strong credit management practices to safeguard cash flow from late payment and bad debt. This begins with getting the basics right by credit vetting new customers to check they will be able to pay their debts on time. If you are not completely happy that the company will pay to credit terms, ask for full or partial payment up front – a credit limit is a reward for good payment, not an automatic right. Once you are satisfied that the company is creditworthy, then ensure that the account is set up accurately including the company’s full name, business address and home address for the company director.
When these basic steps are in place, a strong collections process is vital to obtain payment when the goods or services have been delivered. Invoice promptly and accurately and follow up with reminders. Be consistent and ensure that the person dealing with the collection process is empowered to speak on behalf of the business, with the knowledge, skills and authority to deal with any account queries.
In the collection process, there are times when you encounter customers who either can’t or won’t pay. A customer who can’t pay may have encountered a genuine situation that has led to their inability to pay, so it may be in both your interests to negotiate a settlement. In this situation, there are issues to be determined such as the cause of the problem and how serious it is, what is being done to resolve it, what you can do to help and what, if any, assurances can be offered in return for your help.
The Better Payment Practice Group’s website at www.payontime.co.uk includes information on collecting the cash.
The ICAEW cannot accept any responsibility for the answers to the smallbusiness.co.uk website. By their nature the questions do not give sufficiently precise and full information to give a personal response. The response is general guidance including where the enquirer might find further and fuller information of relevance to the current enquiry.