April 3, 2024

A purchase order is a legal document form used by a buyer and sent to a supplier for an order. A purchase order specifies items, quantities, prices, and credit terms for a purchase from the vendor. A PO becomes a legally binding contract when a vendor accepts the purchase order. What is a Purchase Order? A purchase order is a commercial source document that is issued by a business’ purchasing department when placing an order with its vendors or suppliers. The document indicates the details on the items that are to be purchased, such as the types of goods, quantity, and price. In simple terms, it is the contract drafted by the buyer when purchasing goods from the seller. Steps in Ordering 1. Buyer creates a purchase requisition- Before sending out the purchase order to the supplier, the first step is to create a purchase requisition. This is a document issued within the company to the purchasing department to keep track of the goods ordered.The purchase requisition also helps the company keep an account of their expenses. The PO is created only after the purchase requisition is approved by the authorized manager. 2. Buyer creates a purchase order- When the goods that need to be purchased are agreed upon, the purchase order is created. The PO lists the date of the order, FOB shipping information, discount terms, names of the buyer and seller, description of the goods being purchased, item number, price, quantity, and the PO number. The PO number is a unique number associated with a certain order. It serves two purposes. One is to ensure that the goods ordered match the ones that are received. Secondly, the PO number is matched to the invoice to make sure the buyer is charged the right amount for the goods. 3. Seller accepts (or rejects) purchase order-At the bottom of the purchase order is a dotted line for the authorized manager of the seller to sign off on the order. The PO includes all the details about the transaction and what the buyer expects to receive. Once the seller receives the PO, they have the right to either accept or reject the document. However, once the PO is accepted, it becomes a legally binding contract for both parties involved. 4. Buyer records purchase order- Once the order has been placed, the purchase order remains “open.” An open purchase order is a PO where the order is placed but the goods have not yet been received, or it can mean that only part of the order has been received. Either way, it signifies that the delivery of the goods is not complete. Benefits of Purchase Orders 1. Avoids duplicate orders- Purchase orders bring several benefits to a company. The most important is that it helps avoid duplicate orders. When a company decides to scale the business, POs can help keep track of what has been ordered and from whom. Also, when a buyer orders similar products, matching the invoices can be difficult. The PO serves as a check for the invoices that need to be paid. 2. Keeps track of incoming orders- In addition, POs help keep track of incoming orders, and a well-organized purchase order system can help simplify the inventory and shipping process. 3. Serves as legal documents- Purchase orders serve as legal documents and help avoid any future disputes regarding the transaction. How Does the Supplier Use the Purchase Order? Purchase orders play a major role in the inventory management process. When the supplier receives the PO, they will take the items listed in the PO from their inventory. The PO helps keep a record of the inventory on hand and identify any discrepancies between the values shown in the records and the actual stock. Additionally, the supplier needs the PO to fill the order correctly. The buyer will also be charged by the supplier based on the payment terms agreed upon in the PO. Purchase Order vs. Invoice The purchase order is a document generated by the buyer and serves the purpose of ordering goods from the supplier. The invoice, on the other hand, is generated by the supplier and shows how much the buyer needs to pay for goods bought from the supplier. The PO is a contract of the sale while the invoice is the confirmation of the sale. Purchase Order vs. Sales Order While the purchase order shows what goods were ordered from the supplier, the sales order is generated by the supplier and sent to the buyer. It signifies the confirmation or approval of the sale. Nowadays, the PO process is no longer paper-based, and the buyer usually sends its suppliers an electronic PO. This is done using the PO module in ERP software. It helps speed up the purchasing process while decreasing the chance of error. FAQs What is a purchase order (PO)? A purchase order is a legally binding document issued by a buyer to a seller, indicating the details of goods or services the buyer wishes to purchase. It outlines the quantity, description, price, and terms of the items or services being purchased. Why are purchase orders important? Purchase orders help ensure accurate record-keeping of transactions, establish clear expectations between buyer and seller, and provide a basis for resolving disputes. They also assist in inventory management and financial planning. What information should be included in a purchase order? A typical purchase order includes details such as the buyer’s and seller’s names and addresses, PO number, date of issue, item descriptions, quantities, prices, payment terms Practice area’s of B K Goyal & Co LLP Income Tax Return Filing | Income Tax Appeal | Income Tax Notice | GST Registration | GST Return Filing | FSSAI Registration | Company Registration | Company Audit | Company Annual Compliance | Income Tax Audit | Nidhi Company Registration| LLP Registration | Accounting in India | NGO Registration | NGO Audit | ESG | BRSR | Private Security Agency | Udyam Registration | Trademark Registration | Copyright Registration | Patent Registration | Import Export Code |

SaaS companies utilize a variety of insightful revenue metrics to understand financial performance, create accurate predictions, and make informed decisions. The list of possible metrics to use is expansive and includes a number of highly similar terms that often get confused, conflated, and misunderstood. For example, TCV (Total Contract Value), ACV (Annual Contract Value), and LTV (Customer Lifetime Value) all appear to provide very similar insights into the value of an average customer deal. Of the three, TCV is one of the least understood and, therefore, often underused. WHAT IS TOTAL CONTRACT VALUE (TCV) Total contract value is the overall value of an agreement with a customer, including aggregate revenue expected over the life of the contract, such as up-front payments, subscription payments, implementation charges, ongoing services fees, and one-time charges. TCV is an important metric for finance and accounting leaders — especially in SaaS — because it provides insight into total revenue, not just subscription income. How to Calculate Total Contract Value Total Contract Value includes all of the revenue you’ll receive from a given customer over the duration of their contract. To calculate TCV, you need the following information: Monthly recurring revenue (MRR) for the contract Length of the contract Any one-time fees included  The formula for TCV is as follows: TCV = MRR x contract term length + one-time fees  The Differences Between Total Contract Value, Lifetime Value, and Annual Contract Value There are many different ways to look at and think about the revenue generated by your contract terms, three of which are TCV, annual contract value (ACV), and customer lifetime value (LTV). As mentioned above, TCV is the most holistic way to think about your contract terms, combining all fees and recurring revenue over the length of the agreement. ACV is a similar metric but takes a more narrow view of the customer contract. Unlike TCV, ACV calculations don’t take one-time fees into consideration. Rather, it’s a way to annualize the recurring revenue from a customer contract. So, consider a two-year contract for $48,000 and a $5,000 upfront implementation fee. The TCV would be $53,000. But your ACV would be $24,000 ($48,000 divided by the two-year contract term, not including the service charge). In a SaaS business, ACV is a far more commonly-tracked metric than TCV because of the major focus on subscription revenue. Comparing TCV to LTV is a bit more nuanced. Some non-SaaS businesses might talk about the two interchangeably because, technically, TCV is the value of a deal over its lifetime. But in a recurring revenue, subscription-based business, renewals are everything. That’s why your LTV calculations incorporate churn rate as you try to determine how far beyond the initial contract a customer will stay with you. Whereas TCV only considers the life of a single contract, LTV accounts for the revenue you expect to generate over the entire span of a relationship with a customer. That may include multiple contract renewals. So, in the example above, imagine you renewed the two-year, $48,000 contract for two more years with a 10% increase to $52,800. If the customer churned after those two years, you’d find the LTV by combining the total value of both agreements — $105,800 in total. Each of these metrics brings unique value to your business. Total contract value shows you the actual, committed revenue you’ll generate from a deal. Annual contract value shows you the average ARR you expect from new customers, which can help you build assumptions for revenue forecasting. Lifetime value shows you what you can expect to earn from a customer across (potentially) multiple contracts, which helps you calibrate your customer acquisition cost (CAC). Why SaaS Companies Should (or Shouldn’t) Track Total Contract Value The truth is that total contract value is not a standard metric for the purest of SaaS businesses. However, not every SaaS business is well-suited to focus specifically on ACV, where recurring revenue is the entire focus. If you have a complex business model — or at least have a significant services arm or even hardware component — TCV becomes a more important way to understand cash inflows and improve the precision of cash flow forecasting. Palantir is a good example of the use of TCV in a SaaS business. Since Palantir’s IPO in 2020, market analysts have debated the company’s business model. As a tech company with recurring revenue, Palantir was often valued as a SaaS business (which it is). But the company pulls a significant amount of revenue from its services business. As such, you’ll see TCV reported as a metric in Palantir’s SEC filings. Without it, they’d be under-reporting new bookings generated by nearly $1 billion per quarter. Think about your own business model. If one-time fees or recurring service costs are a major part of your contracts, consider making TCV a standard part of your financial reporting. If you’re mainly a subscription/recurring revenue business with some services here and there, focus on ACV instead. How to Improve TCV for Your Business Contract length. If your specific goal is to increase TCV, the easiest way might be to increase the length of your contracts. Instead of selling annual deals, consider making multi-year contracts the standard. If it aligns with the value you provide customers, you’ll see TCV trend upward. Pricing. The other variable is pricing, whether that’s on the recurring revenue side or the one-time fee side. Maybe you increase the cost of your implementation services. Or, maybe you raise the rate of your subscription fees. Either way, higher prices means higher TCVs. FAQs What is the difference between TCV and ACV? Total contract value is the total amount of revenue you’ll earn over the length of a contract, including any service fees or one-time costs in addition to the monthly subscription. ACV, on the other hand, is an annualized view of contract value that only includes recurring revenue, not one-time fees. What is the difference between TCV and revenue? TCV is one component of revenue, indicating the income you’ll generate from an individual customer contract. However, revenue is a much broader term that would incorporate contract