What is a Purchase?

What is a Purchase?

Definition

Purchase refers to the acquisition of goods and services. Companies regularly buy raw materials and other items that are needed for the manufacturing process. Service companies also need to make purchases so that they are in a position to meet the needs of their customers.

What does purchase mean?

It is critical for a business organization to develop an efficient method for making purchases. Paying the correct price and procuring materials of the appropriate quality can play a substantial role in a company’s success.

For example, if a company pays an excessive amount for its purchases, it would result in a higher cost structure. The goods that it produces would need to be sold at a higher price. This may result in the loss of customers. Additionally, if the purchases that a firm makes are of poor quality, its products would be of inferior. This, too, could affect its sales and its image in the market.

To address these issues, most companies that grow beyond a certain size, have a purchasing department. This unit is responsible for ensuring that all the purchases made by the company meet the requirements that have been specified by the department that is requesting the materials. The purchasing department is also responsible for minimizing the costs of the goods and services that it purchases.

When a company makes a purchase, payment could be made in advance, against delivery of goods, or at a later date. Buyers usually prefer to make purchases on credit. This allows them to improve their cash flows and save on interest costs as well.

Example of purchase

Hazmat Services is a transportation company that specializes in the disposal of hazardous materials. In the last year, its business volumes have expanded very quickly. Consequently, it has added many additional vehicles to its fleet.

However, the company’s costs have spiraled out of control. Every department within Hazmat Services makes its purchases independently. This has resulted in a situation where there have been times when the same item has been purchased by different individuals within the company at varying prices.

Hazmat Services decides to set up a purchasing department. All purchases will have to be routed through this new unit. Three months after creating the purchasing department, the company conducts a review. It discovers that its purchasing costs have come down by 10%. The cost of running the new department has been paid for many times over with these savings.

Summary

A purchase refers to the activity of ordering and receiving goods. Companies should monitor their purchase practices very carefully as these can have a significant effect on profitability.