What Is a Purchase Order: Complete Guide

If you’ve ever ordered supplies or outsourced services to another vendor, you’ll know how important it is to get every detail correct. And if you’ve never done that, you’re in luck because today, you’ll learn how to do it right with the help of a purchase order (PO).

In this article, we’ll show you everything you need to know, including the purchase order definition, a purchase order example for each of its types, an explanation of how a purchase order works, and a comprehensive guide to creating a purchase order online.

What Is a Purchase Order?

The purchase order definition says that a PO is a formal, legally binding document issued by a buyer to a seller detailing the full scope of products/services ordered, including their quantities, agreed prices, and any specific terms and conditions.

You can think of it as a shopping list you pre-approved with your business partner rather than a family member or a spouse to ensure that you buy exactly what you want without forgetting anything or overspending on unnecessary items. But there’s more to it.

Why Are Purchase Orders Important?

In practice, POs are more than just “shopping lists.” The purchase order represents a contractual agreement between two parties that ensures everyone is legally protected and obliged to fulfill their respective sides of the agreement. POs assist with:

• Clarity: POs eliminate ambiguities by clearly outlining purchase requirements.
• Legal Issues: As binding documents, POs can be sourced for legal proceedings.
• Inventory Control: POs help monitor incoming goods and plan inventory levels.
• Financial Management: POs help track expenses and manage budgets.
  

Why Do You Need a Purchase Order?

Although we’ve given you the definition and meaning of purchase orders above, the truth is that POs are a business tool like any other. That means that the ways you use them and the results they generate for your company can vary wildly. PO use cases vary:

1. By Company Size:

• Freelancers & Contractors: POs help set clear expectations from the start, outline the deal’s details, prevent changes in scope and payment delays, and offer legal protection.
• SMBs & Mid-Size Businesses: POs help track orders across multiple suppliers and vendors, ensuring accuracy in purchases and managing budgets and inventory on a rolling basis.
• Enterprises: POs help streamline effective internal and external communication, prevent unnecessary double-orders, maintain transparent procurement, and eliminate waste.

2. By Industry:

• Retailers: POs help keep shelves stacked and customers happy by maintaining effective supply lines, preventing shortages, and providing a paper trail for tracking seasonal demand, returns, and reorders.
• Manufacturers: POs help coordinate suppliers, maintain a steady production line, and prevent delays so that they can deliver on customer demands based on internal purchase orders.

How Do Purchase Orders Differ from Other Documents?

When managing business transactions, it’s easy to confuse purchase orders (POs) with other key documents, like invoices, sales orders, or purchase requisitions. However, each serves a unique role in procurement and payment processes. Below, we’ll clarify the differences.

At first glance, purchase orders may seem similar to other documents, such as invoices, sales orders, and purchase requisitions, which we’ll discuss below. However, confusing these business documents can quickly turn into a costly mistake.

Purchase Orders Vs. Invoices

Both purchase orders and invoices are essential in completing transactions, but they serve opposite purposes. While a PO initiates the buying process, an invoice finalizes it by requesting payment. Here’s how the two differ:

Purchase Orders Vs. Sales Orders

While it’s clear why it’s so easy to confuse POs for sales orders (SOs), there’s a crucial difference. SOs are essentially confirmations sent as reactions to POs, formally agreeing to the details of the deal. Here’s how the two differ:

Purchase Orders Vs. Purchase Requisition

Purchase orders and requisitions contribute to the buying process but at different stages. While a purchase requisition is an internal request, a purchase order is a formal order sent to a supplier. Here’s how the two differ:

What Are the Benefits of Purchase Orders?

While keeping a paper trail of all your purchases is certainly helpful, there are numerous other benefits to using digital purchase orders for your operations. Below, you’ll find a general overview of why you should take advantage of POs. Benefits include:

1. Effective Communication: Providing suppliers with a detailed summary of requested products and quantities helps lower the risk of errors by 20%, speed up deliveries, and fuel internal decision-making regarding inventory stocking.
2. Legal Protection: By agreeing to the deal specifications outlined in a purchase order, all parties involved benefit from the mutually binding agreement that enforces and ensures each side fulfills its contractual obligations on time.
3. Purchase Order Financing: By documenting finalized and intended purchases, management can monitor expenditures and forecast future costs based on past quarters to inform budgeting decisions and maintain the bottom line.
4. Inventory Management: By planning and managing inventory levels, businesses that sell physical goods can oversee incoming stock, improve the scheduling of storage space, and streamline inventory turnover.
5. Digital Efficiency: By creating, maintaining, and supplying digital versions of purchase orders, businesses can save up to 35% on procurement times with automation, increase accessibility, and boost efficiency with 3rd party systems.

How Do Purchase Orders Work?

So, we know what POs are, how they differ from other documents, and why you should use them. But how do they work? In this section, we’ll outline everything you need to know to use them effectively. The purchase order process consists of: 

1. Purchase Requisition: When a department or individual within the buying organization identifies the need for specific goods or services, they draft a purchase requisition to request approval for the intended purchase.
2. Requisition Approval: The purchase requisition (PR) must be reviewed by the appropriate authority (based on company structure) before it is approved. The authority evaluates the budget, necessity, and company policy.
3. Purchase Order Creation: Upon approval, the responsible party generates a purchase order, documenting all necessary details, including the company information, purchase order number, itemized list, and terms and conditions.
4. Purchase Order Delivery: Once prepared, the PO is sent to the seller (or multiple, if necessary). If the supplier or vendor is willing to fulfill the order, they can formally accept it via a sales order to make the PO binding.
5. Order Fulfillment: The seller processes the order, arranging for the delivery of goods or provision of services as specified in the PO at the agreed-upon price within the required time frame. Failure to do so can lead to a lawsuit.
6. Invoice Creation: After the order is fulfilled, the seller generates and issues an invoice referencing the specific purchase order number to ensure the payment is associated with the correct paperwork and is promptly delivered.
7. Payment & Record-Keeping: The buyer processes the vendor’s delivered invoice and issues a payment within the specified time frame. They continue to maintain records of the transaction for accounting and auditing purposes.

What Are the Different Types of Purchase Orders?

Not all purchase orders are created equal. POs come in multiple types, which are best suited to different transactions and frequencies. By choosing the right type of PO, you can streamline your procurement process and minimize admin. PO types include:

#1: Standard Purchase Order

The most common type of PO used for one-time purchases, such as buying equipment or ordering a company audit. It features all the necessary details up front, including item descriptions, quantities, prices, delivery schedules, and payment terms.

#2: Blanket Purchase Order

A blanket purchase order is used when you intend to make repeated purchases over a long period with the same supplier, most often for items with predictable demands, like stationery. It allows you to lock in specific terms, like prices and delivery schedules.

#3: Contract Purchase Order

Contract purchase orders are strategic agreements used to establish long-term partnerships between buyers and suppliers without committing to specific quantities or delivery dates to maintain flexibility, such as in construction or manufacture.

#4: Planned Purchase Order

Planned purchase orders are similar to other POs but include anticipated delivery schedules for multiple shipments over time to maintain adequate inventory across a longer time while giving the buyer some flexibility, such as in manufacturing.

Download all purchase orders for free right here.

How to Choose the Best Type of Purchase Order?

Selecting the right purchase order for your unique business needs can streamline your workflows and build better relationships with your vendors. However, doing so requires an appropriate amount of effort. So, how do you do it?

1. Evaluate Your Ordering Frequency: How often you buy from specific suppliers is vital in choosing the best PO for your business. For example, blanket POs are best for repeat purchases, while standard POs are excellent for one-off arrangements.
   Tip: Review past orders with suppliers to identify items or services you regularly purchase. This can help you decide if a blanket PO is worth implementing for long-term savings.
2. Consider Flexibility Needs: If your industry has to account for variable demand and production schedules, flexibility is key. For example, a contract PO is perfect for fluctuating needs, while a planned PO provides more predictability while still allowing some flexibility.
   Tip: If you’re unsure of your exact order requirements, start with a contract PO. This lets you secure favorable terms without committing to specifics, so you have room to adjust quantities as needed.
3. Assess Supplier Relationships: Do you have a strong and long-standing business relationship with your supplier? In that case, blanket and contract POs can streamline your processes and reduce paperwork. However, standard POs work best for testing new vendors.
   Tip: Use a standard PO for initial orders with a new supplier to ensure consistency and quality. Once confident in their reliability, consider switching to a blanket or contract PO for future orders.
4. Match Purchase Order Types to Your Industry: Does your business need predictable inventory items? In that case, consider a blanket PO. However, if you work in construction or manufacturing, you may find planned and contract POs better suited to managing fluctuating supply needs.
   Tip: Research industry best practices for procurement, as many businesses in similar sectors face the same purchasing challenges. Learning from these examples can help you choose the most effective PO type for your operations.
5. Factor in Inventory and Storage Constraints: Do you contend with limited storage? Then a planned PO can help manage incoming orders without risk of overstocking and align inventory with sales cycles. Meanwhile, blanket POs ensure you always have stock without worry.
   Tip: Map out your inventory turnover rates and align PO types with storage capacity. Planned POs are excellent for high-volume items with seasonal or scheduled demand, while blanket POs work well for items with steady usage.

How to Create a Purchase Order?

So, we’ve discussed purchase orders, how they work, and even which types are best for each situation. But how do you make a purchase order? Below is a comprehensive guide with everything you need to know. Create a PO by:

1. Gather Necessary Information: Before you start drafting your purchase order, you must ensure you have all the necessary information to fill it out correctly. This includes:
   – Company Information: Name, address, and contact for both parties.
   – Purchase Order Number: Uniqe, one-time identifier for tracking.
   – Item Details: Descriptions, quantities, unit prices, and total amounts.
   – Delivery instructions: Shipping address, delivery dates, etc.
   – Payment Terms: Agreed-upon payment schedules and methods.
   – Terms and Conditions: Legal clauses, warranties, and return policies.
2. Save Time with a Template: Instead of creating a custom PO design from scratch, choose a trusted provider like Billdu to download editable purchase orders for Word, Excel, or PDF. Or create branded digital documents directly with our Online PO Generator.
3. Outline Terms & Conditions: Next, write down and clearly articulate any special terms to avoid mistakes and build an effective working relationship. This includes:
   – Delivery Expectations: Timelines, methods, and handling instructions.
   – Payment Terms: Due dates, discounts, or penalties for late payment.
   – Legal Clauses: NDAs, liability limitations, or dispute resolution process.
   
4. Review and Approve the PO: After inputting all your information into the purchase order and adding any branding flourishes (logos, signatures, etc.), the document must be internally verified for details, budget alignment, and stakeholder sign-offs before sending.
5. Send the PO to the Seller: When the document is finalized, all that’s left to do is deliver it to your chosen supplier. If possible, use email or Electronic Procurement Systems (EPS) for a faster turn-around and the added benefit of a digital record.

Best Practices for Creating Purchase Orders

If you’re using the right types of purchase orders for your business needs and communicating effectively, you’re already most of the way to success. However, a number of best practices can improve the process even more. These include:

• Use Clear Descriptions: Provide detailed and precise descriptions for each item or service. This minimizes the risk of receiving incorrect goods and facilitates smoother inventory management.
• Set Realistic Timelines: Account for order processing and fulfillment to establish achievable delivery dates. Unrealistic expectations can strain supplier relationships and disrupt operations.
• Maintain Open Communication with Suppliers: Fostering strong relationships with your business partners is crucial for maintaining effective business continuity. Implement regular updates and feedback mechanisms to ensure alignment and improve future collaboration.
• Train Your Team: Ensure that all staff involved in the procurement process understand how to create and manage purchase orders effectively, as well as how to use any internal tools and systems necessary to increase operational efficiency.
• Automate with Digital Purchase Orders: Leverage technology to automate the purchase order process as much as possible to prevent mistakes and save time with powerful digital platforms such as Billdu and other 3rd party integrations.

How to Automate Purchase Orders with Billdu

Did you know that, according to the Institute of Finance and Management (IOFM), leveraging purchase order automation can reduce processing costs by up to 75%?
And that’s not where the benefits of using Billdu end. 

Starting at just $4.99 per month and featuring a 30-day free trial for all plans, Billdu is the best SMB-friendly digital invoicing system for increasing your efficiency, reducing errors, enhancing visibility into your finances, and saving costs on stationery and manual tasks.

Why use Billdu to generate your purchase order?

• Customizable Templates: Tailor POs to match your branding quickly and easily.
• Process Automation: Automatically generate and issue POs to suppliers.
• Real-Time Tracking: Monitor the status of your orders and payments.
• 3rd Party Integration: Integrate with accounting and inventory systems.
• Mobile-Friendly: Access your system anywhere and anytime.

Today, you (hopefully) learned everything you needed regarding purchase orders. But your journey doesn’t have to end there. Take the next step toward true processual efficiency and take advantage of Billdu’s digital system. Sign up now!