A standing order is a recurring authorization to purchase or pay. The concept can apply to both the purchasing and payables areas, where the differences are as follows:
- Purchasing. A recurring purchase order, which may be called a master purchase order, is issued to a supplier that authorizes recurring deliveries to the buyer. This agreement typically specifies the prices to be paid and quantities to be delivered over a specific purchasing period. The seller may be required to wait for specific authorizations to be sent by the buyer, or simply to make deliveries on a recurring basis.
- Payables. Recurring payments of the same amount are made to suppliers. This approach is commonly used for contractual obligations, such as monthly payments for insurance, rent, loans, and parking fees. This is typically in the form of instructions with the buyer's bank to issue payments at regular intervals to the seller's bank account. The information on a standing order is commonly noted on an authorization form that is required by the buyer's bank.
Standing orders can increase the efficiency of a business by replicating purchases and payments, rather than requiring that individual transactions be initiated each time a purchase or payment must be made. Doing so greatly reduces the associated amount of paperwork. The danger in using them is that they may run too long, so that purchases may continue to be made after they are no longer needed, or payments made after there is no longer an obligation to do so. Consequently, the termination dates of standing orders must be constantly monitored.
Another concern is that either type of standing order can create a significant obligation for a business, so tightly restrict the number of employees who are authorized to issue them.