What is a purchase order (PO)?

A purchase order is simply a document issued from a buyer to a supplier that details the nature and terms of a sale. 

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November 21, 2023
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What is a purchase order (PO)?

A purchase order is simply a document issued from a buyer to a supplier that details the nature and terms of a sale. 

Purchase orders play a key role in streamlining your processes, maintaining organized operations, managing supplier relationships, and staying on top of expenses and budgeting. 

In this article, we explain how you can make the most of purchase orders to drive success, including how purchase orders work, the different types of purchase order, the benefits to your business, and how they differ from invoices.   

What is a purchase order?

A purchase order is a financial document that you, as the buyer, issue to your suppliers or vendors to request their products or services. 

Each purchase order should provide details of the type and quantity of goods you want to buy, as well as payment and delivery terms. This ensures that, before the agreement is finalized, the seller is capable of fulfilling the request and the buyer is prepared to pay. 

Once received, the purchase order acts as a legally binding contract between the buyer and the seller. It also helps to avoid confusion over the terms of the sale and serves as a detailed record for auditing and financial statements. 

How does a purchase order work?

Purchase orders are commonly used by small and medium-sized businesses that sell online to request goods in bulk from their suppliers, though they can also be used by larger online merchants that want to streamline their operations. 

Here’s how the purchase order process works:

Step 1: The buyer establishes their need and creates a purchase requisition

Before creating a purchase order, you need to establish exactly what goods you need, the quantity needed, when you need the order to be fulfilled by, and where they can be sourced from. 

You can then issue a purchase requisition to the relevant department head, who can approve and record the order. In a small company, you may not have a specific department for purchasing, but it’s still important that someone senior authorizes the order.

Step 2: The buyer creates the purchase order

Now you can create and issue the purchase order to the most suitable supplier for the job. 

It should include: 

  • The date
  • The names and addresses of the buyer and seller
  • The description and quantity of the products or services required
  • The price
  • The PO number - a unique sequence of characters that’s used to keep track of the order and ensure it can be matched to the invoice 

Step 3: The supplier approves or rejects the purchase order

Once the supplier has received the purchase order, they can review what’s required of them and decide whether or not they are capable of fulfilling the request by the expected date. They may need to conduct internal checks of their inventory and shipping capacity. 

If accepted, the supplier authorizes the purchase order by signing it off. It then becomes a legally binding agreement between buyer and seller. 

Step 4: The supplier fulfills the order and the buyer pays the invoice

The supplier now ships the goods or delivers the services required and submits an invoice to the buyer. This recaps the key information from the purchase order and requests payment. Until you have received the order in full, it remains ‘open’. 

Once the order has been completed, you can pay the invoice according to the payment terms. 

Types of purchase orders

There are several types of purchase order that businesses can use for different purposes, including:

A standard purchase order

A standard PO is a one-off request for a single shipment of goods or delivery of a service. Each standard purchase order must detail the nature and terms of the request and go through an approval process. 

Blanket purchase order

A blanket purchase order (BPO) is a long-term agreement between a buyer and a supplier for a recurring delivery of goods or services at a fixed price and over a specific time period. Each recurring order can use the same PO number.  

BPOs streamline the negotiation and approval process by combining multiple requests and shipments into one contract. For the buyer, by agreeing to a set cost ahead of time, they also help to avoid price fluctuations in the market that could occur over the duration of the agreement. 

Planned purchase order

A planned purchase order is similar to a standard PO, but it doesn’t specify the delivery date or address. Instead, they can be used to quickly issue an order request when needed - for example, to restock items at irregular intervals. 

Contract purchase order

A contract purchase order simply outlines the terms of the agreement between the buyer and the seller for future orders, but does not provide details for any specific order.

In this way, it acknowledges that future orders will occur, and provides a framework when they do. 

Benefits of using purchase orders

The main benefits of using purchase orders are:

  • They’re legally binding - as a binding contract between buyer and seller, purchase orders ensure that both parties will fulfill their obligation or else face consequences. In the event that anyone does not hold up their end of the bargain, or if there is a dispute, the other party is protected 
  • Avoids confusion - by putting the exact terms of the agreement in writing, which is then approved and signed by both parties, there’s no chance for confusion or miscommunication. Both buyer and seller know exactly what’s expected of them. 
  • Efficiency and organization - purchase orders are also a great way for your business to keep track of all its orders and expenses, which is useful for streamlining inventory and shipping, and for maintaining accurate records. And, as each PO is matched to an invoice, it makes it easy to keep an eye on which invoices are outstanding 
  • Inventory tracking - they also help your suppliers keep track of their inventory so they can maintain adequate levels of stock. This ensures they will be able to meet your requests on time

What is a purchase order vs invoice?

There’s one simple distinction between a purchase order and an invoice: a purchase order is created by you, the buyer, and an invoice is created by your supplier. The purchase order is issued to request products or services and the invoice is issued to request payment for those products or services once the order has been fulfilled. 

Aside from those factors, both documents contain matching information about the nature of the products or services, the terms of the agreement, and the amount owed. 

How to create a purchase order

Purchase orders can be created using specialist software or they can be drawn up in Word or Excel. 

However they’re generated, your purchase order should include:

  • Contact information - the addresses and names of both the buyer and seller should be included at the top of the page. This ensures the contract is legally binding between those two parties and serves as a shipping address for the supplier
  • The nature and quantity of the goods or services required - specify exactly what is required of the seller so that they can check they are capable of fulfilling the request. This could be in the form of a product code or detailed description
  • The date - the date that the purchase order is issued is important for tracking and record keeping
  • The delivery date - this specifies a deadline for when the goods or services must be delivered by
  • The price - for example, this could be the per unit cost or, for a service, an hourly rate
  • The payment terms - this details when the invoice will be settled and how. For example, it could be paid in full upon delivery or, if delivery is staggered, it could be settled in installments. You could even include a payment link for extra convenience
  • Price summary - finally, you should also include any discounts, shipping costs or taxes that need to be factored into the overall cost and then summarize with a grand total

How Checkout.com can help with purchase orders

Checkout.com can help with all your invoice settlement and payment processing needs. Whether you have domestic or international suppliers, or you need to make a single payment or a repeat payments, we make it easy to do so in whichever way works for both parties, ensuring productive and long-lasting commercial relationships. 

That’s because, through our integrated payment platform, you can access dozens of payment methods and hundreds of currencies, and take advantage of our recurring payment and automated invoice processing support.

Find out more about payment processing with Checkout.com and speak to a member of our sales team.   

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November 21, 2023 11:43
November 21, 2023 11:43