What Is a Purchase Order? The Complete Guide

ByBojan Jovanovic
November 28,2022

Creating and sending purchase orders (POs) can be daunting for inexperienced business owners. For some, it can be hard to keep track of all of them as they pile up, while others stress about filling these important documents flawlessly to ensure smooth order processing.

Thankfully, there is software available that can help manage the entire process, from start to finish. Businesses can leverage technology to create and send purchase orders quickly and accurately. These systems often come with additional features such as automated reminders, tracking capabilities, and more.

Our article will answer all your PO questions - e.g., What is a purchase order? Why are they important? How do they work? - and teach you about the various ways businesses use purchase orders, as well as how to create and send them yourself.

Purchase Order Definition

So you've heard the term many times and are wondering, “What is a PO, exactly?” In a nutshell, a purchase order is a legally binding contract created by a buyer to communicate a seller's demand for goods or services. It is generated after the buyer and seller agree on the terms of sale, such as pricing, quantity, delivery date, and payment terms.

The PO serves as a formal record of the details of the transaction between the two parties and can be used as a reference in case of any disputes. POs are typically used for business-to-business transactions and can be sent electronically, via fax, or by mail.

A complete PO will include all relevant information, such as vendor details, product/service descriptions, prices, delivery methods, and payment conditions. Once it is received by the seller and accepted, it becomes subject to the terms both parties must abide by.

The Role of a PO in Business

POs are created anytime you need to buy anything from a vendor. For example, if a company needs to buy 500 chairs for an office renovation project, it would place an order using a PO system. This ensures both parties have clear documentation outlining the specifics of the transaction.

The purchase order system is essential to any successful purchasing process and helps ensure goods and services are delivered on time and per the contract terms. It also allows companies to track their spending more accurately and helps them budget accordingly.

Having a purchase order system in place also ensures better communication between buyers and sellers and eliminates any confusion over what has been ordered or agreed upon. This ultimately leads to more secure transactions with less risk of misunderstandings or legal action from either side.

Why Is It Important to Have a Purchase Order?

Imagine you are a business owner who has just been handed a PO from a potential new client. You've never seen one before, so you're not sure what it is exactly, but you should learn how to use it. Here are some reasons buyers should know the ins and outs of POs:

  1. To make sure they’re ordering the correct items
  2. To make sure they're getting the best price possible
  3. To make sure the order is correct and can be delivered on time
  4. To keep track of buyer and vendor expenses
  5. To make sure buyers are within budget

By taking the time to learn more about this vital tool, business owners can streamline their operations and improve customer satisfaction.

How do POs Work?

A PO is essentially a document sent from a buyer to a seller, stating the products, quantities, and agreed prices for goods or services the seller will provide to the buyer. It also serves as an offer from the buyer to purchase those products or services at the given price. The PO serves as legal protection for both parties, and it must be approved by both before any transaction can take place.

Once a purchase requisition form is filled and accepted, buyers are protected from price increases or ordering errors, as all costs and terms must be clearly stated in advance.

The supplier typically then sends an invoice to the buyer, which contains all of the same information as the PO. This invoice signals that the order details have been finalized and are ready for payment. Once payment is received from the buyer, it signals that all obligations regarding the PO have been completed.

How to Create a PO in a Few Easy Steps

  1. Log into the company’s procurement system or software and find the purchasing order form.
  2. Fill out the PO with all the necessary information, including supplier contact info, item name, description, quantity required, unit price, total cost, payment terms, delivery terms, and expected delivery date.
  3. Once you've completed the order form and double-checked all your entries for accuracy, submit the purchase order request to management for approval.
  4. Obtain a signed copy of the approved PO from the purchasing department manager before sending it to your supplier to ensure both sides have agreed on all of its contents in writing.
  5. Forward an electronic or hardcopy version of the PO to the supplier.
  6. The supplier will confirm receipt of the PO and provide an estimated delivery date for the requested goods or services.
  7. When the goods or services arrive, check that they match what was ordered and submit payment according to the agreed-upon price.

Following the purchase order process will ensure that you have a complete and accurate record of all purchases made by your purchasing department. This information can be invaluable in helping your company better manage suppliers, negotiate more favorable contracts and stay compliant with relevant laws and regulations.

10 Tips for Using Purchase Orders Effectively

  1. Planning: When issuing a purchase order, it's important to allow enough time for the supplier to fulfill the order and anticipate any delivery delays.
  2. Pay attention to detail: Make sure that all information on the PO is accurate and up-to-date, so there are no misunderstandings between you and your supplier. This includes pricing, payment terms, shipping details, product specifications, etc. 
  3. Stay organized: Keep track of all POs issued by organizing them into folders or using filing software such as Excel or Quickbooks. This allows you to quickly locate a PO if necessary and also helps with budgeting and accounting tasks. It’s also easier to rely on legal protection in case of disputes if you can easily locate all relevant documents.
  4. Follow up: If there are any discrepancies with the PO, address them immediately. This will help ensure that everything is done properly and promptly. 
  5. Use the latest technology: Automation tools such as PO software can help streamline the process by automating many of the manual tasks associated with issuing purchase orders. This can save you time and money while ensuring accuracy and efficiency.
  6. Negotiate terms: Don't be afraid to negotiate payment and other conditions that may benefit both parties involved in the transaction.
  7. Establish relationships: Good relationships with suppliers are vital for ensuring future success with purchase orders. Open communication and following up on time can go a long way toward achieving your business goals.
  8. Monitor performance: Make sure your suppliers are fulfilling their obligations according to the terms of the PO. Doing so will help you identify any areas in which improvement is needed or where alternative suppliers may be necessary.
  9. Stay compliant: Staying updated on applicable laws and regulations when issuing purchase orders is essential for remaining compliant with local, state, or federal laws. Familiarize yourself with all relevant rules and make sure that all of your purchases follow those rules accordingly.
  10. Leverage data: Analyzing the data associated with your purchase orders - be they on the buyer or seller side - can help you identify opportunities for cost savings, streamline the buying process, and improve supplier relationships.

Bottom Line

Using POs effectively is an essential part of any successful business nowadays. Following a strict purchase order process can help your business save time and money while ensuring accuracy and efficiency. 

For example, a PO system for a small business uses automation, and tracking data from your POs can also provide additional insights and help you make more informed business decisions. By following this guide, you will be well on your way to using purchase orders effectively.

What does PO stand for?

PO stands for purchase order. It's a legally binding document that serves as an agreement between the buyer and seller, providing details of what is being purchased, in what quantity, and any other relevant information.

What is a blanket purchase order?

Blanket purchase orders (BPOs) are a type of purchasing agreement that allows the buyer to buy goods or services from a vendor in batches over an extended period. It is often used when the purchaser needs to replenish inventory on an ongoing basis but wants to avoid issuing multiple orders.

What does a purchase order look like?

Purchase orders typically include the supplier's name, contact information for both buyer and seller, the product name and description, the quantity to be purchased, the price of each unit, the total cost of the order, payment conditions, and other relevant information.

What is a purchase order number?

A purchase order number, also known as a PO number or simply “PO,” is a unique reference number assigned to each transaction between a buyer and seller. A purchase order number helps both parties track the progress of the sale and ensures that payments are received on time. In addition to monitoring the progress of orders, purchase order numbers can help buyers and sellers reconcile sales and accounts receivable records.

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It can: Help keep track of inventory levels and value, Enable better detection of obsolete inventory, Help avoid overstocking or undersupplying products, Provide useful information for financial reporting, Help save money on inventory costs. Bottom Line In our inventory accounting guide, we showed you why this is such an essential tool for small businesses and how to use it to your advantage.  This type of accounting allows businesses to track their inventory levels, value their inventory, and make informed decisions about purchasing and selling merchandise.  It can also help businesses to manage their cash flow and provide information about when inventory levels are low and need to be replenished.  Overall, inventory accounting is a valuable tool that can help small businesses to run more effectively and efficiently.
By Djordje Tresac · November 17,2022

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