Is a Purchase Order an Asset or Just a Contract?
Posted on August 20, 2013 in Purchase Order Finance
One of the more interesting discussions when it comes to purchase orders is whether a purchase order is an asset as well as being a binding contract. In order words, does the promise to pay for a product or service carry some kind of financial value to the company beyond the funds that stand to be collected from supplying the product or service?
This is an important discussion because companies are always looking for ways to create assets that can be used to finance corporate projects. We can establish, without a shadow of a doubt, that a purchase order is indeed a binding and legal contract to pay between a provider and client. As the AllBusiness.com website points out, the supplier must fulfill the terms of the purchase order for it to be legally binding. Once the terms have been fulfilled, the purchase order becomes a legal contract.
Since a legally binding purchase order that has had all of its terms fulfilled by the supplier presents a legal obligation to the customer, it can become an asset to the company. The trick is in finding a way to turn that purchase order into an asset in and of itself.
If the invoice associated with the purchase order is paid, then the full value of the purchase order and the invoice have been realized. A payment in full would be considered the best case scenario for the supplier and it happens significantly more than a default situation. When the customer defaults on the purchase order agreement, then the purchase order can still have a diminished value for the company in two ways.
The first way to gain value from a purchase order is through purchase order lending. This is when you leverage the good credit of your customers to get financing for your company. For example, if you have $10,000 in good faith purchase orders, then you can use those purchase orders to borrow $10,000 in funding to help make payroll or pay off company debts. Purchase order lending is actually more widespread than people may realize and it is an effective way to get quick financing for a company.
What about purchase orders attached to invoices that are 60 days past due or longer? When an invoice starts to become seriously delinquent, the supplier has a serious decision to make. If the customer has not gone out of business, then the supplier can choose to sell the purchase order to a collection company. The collection company will only pay a fraction of the value of the invoice and purchase order, but it is a chance for the supplier to cut its losses and get some kind of revenue to apply towards the invoice.
A purchase order that has been fully executed by the supplier becomes a binding contract with the customer. As a binding contract, that purchase order assumes the value of the product or service that is listed on it. The purchase order itself can be an asset to the supplier as a promise of payment from the customer. If the customer fails to pay the invoice, then the purchase order can be sold at a loss. It is not necessarily a financial asset, but the purchase order still retains some sort of value that can be traded in return for financial compensation.