What is a purchase order?

Emma Roberts

Brokerage Manager

February 9, 2024

Whether you are a startup business owner or a seasoned entrepreneur, purchase orders make up an important part of your daily business administration.

Understanding what a purchase order is, the different types, and how to correctly generate one will ensure you get it right every time.  

Let’s take a look at purchase orders in more detail.  

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What exactly is a purchase order?

Essentially a purchase order or PO is a document sent from a buyer to a supplier outlining the purchase. It will include what they would like to buy and how much of it they require. In short, a purchase order is a legal document of the transaction to be carried out between the buyer and the supplier.

But why bother? Surely you just contact the supplier, tell them what you need, they send it, and you pay? Well in simple terms yes that’s how it works, but what happens when something goes wrong? What if they got your order details wrong? What if there is a payment issue? Delays? Enter the purchase order!

By having a document outlining the order, both the buyer and supplier are protected. Both sides understand what is expected and when its expected. This ensures smooth operations on both sides.

Having a purchase order, you can also ensure that you have detailed records of transactions when it’s time to complete financial or operational audits.

 

How do purchase orders work?

Purchase orders are relatively simple to create or ‘raise’, you can either do this yourself or if you have a finance team, they will normally do this for you.

If you are a small business, then there are wide range of software packages available which will allow you to create purchase orders alongside other helpful process like invoice creation.

Here the steps of raising a purchase order

  1. The buyer orders from the supplier
  2. The buyer creates a purchase order and sends to the supplier
  3. The supplier reviews the purchase order and approves the sale
  4. The supplier sends the goods or provides the services
  5. The supplier issues an invoice
  6. The buyer pays the invoice

What is a purchase order number and why do I need it?

Purchase order numbers are unique numbers assigned to each purchase order. It’s vitally important as a reference for all communications relating to the order. The PO number should be added to the purchase order itself, delivery notes and invoices for tracking purposes. You can either assign these yourself manually or your accounting software can do this for you.

How to create a purchase order

Now you know what a purchase order is and why they’re important let’s take a look at how to create one.

Here’s what you need to include in your purchase order:

  1. Header: This is where you will have your company details such as name, business address and contact information, purchase order number and date the purchase order was created.
  2. Buyer information: This will include the buyer’s business name, the contact name, and the business address.
  3. Shipping information: Here you will need to detail the address to which the goods are being sent, how they are being sent and delivery date and time details.
  4. Order itinerary: Detail what products have been ordered including product codes or SKU, a description of the item, the quantity ordered and the cost of each item.
  5. Order terms: Payment and delivery terms should be detailed here.
  6. Order summary: General details of the order should be put here. Subtotals, discounts, taxes, shipping cost and the overall total cost of the order.

 

Types of purchase order

It’s important to know that not all purchase orders are the same. In many cases a standard purchase order will be just fine, but in some cases a different type will be needed.

Standard purchase order – As its name suggests this is the standard and most commonly used type of purchase order. Highlighting the item or service required, a description, the quantity needed, terms and delivery details.

Blanket purchase order – This purchase order is used for multiple and recurring orders. By completing a blanket purchase order you can negotiate better deals and discounts.

Contract purchase order –  This type of purchase order is the most formal of the three and is accompanied by a contract outlining terms and conditions of the order. This contract is created prior to the purchase order being raised. This type of purchase order offers the most legal protection to all parties involved in the sale. It is often favoured when embarking on long term business relationships.

 

Purchase orders are relatively simple documents to create, but they are a great way to ensure both the buyer and the supplier are clear on the purchase and protected for potential issues. They ensure clarity and transparency of a transaction making buying and selling a safer and more efficient process for all.

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