What is a purchase order? Plus 6 best practices for a PO system
What is a purchase order?
A purchase order (PO) is a document that describes the product a buyer wants to purchase from the supplier, the quantity of the product, its cost per unit, and when it’s required.
When the seller accepts the order, the purchase order becomes a legally binding contract, obligating the buyer to pay after receiving the product or service. POs are useful for buyers as well as sellers because they make it easier to track transactions and key product or service information.
What is a purchase order vs invoice?
Invoices and purchase orders play a significant role in the purchasing process, but their functions differ. The main distinction is what they document and when you send them.
The purchase order records the buyer's intent to purchase a product, while the invoice records the actual sale of the product. The buyer sends the supplier a PO for them to accept. The seller then sends an invoice as a payment request after delivery.
Many companies need a PO to create an invoice for a specific order.
How does a purchase order process work?
When someone within the buying organisation identifies a need for certain goods or services, they usually need to create a purchase requisition that a purchasing manager in the company will approve or decline.
If approved, the procurement manager or team will select a supplier or vendor and send them a formal purchase order. The purchase order includes all the details of the product or service, including a description, quantity, price, delivery terms, and also includes a unique PO number for tracking purposes.
The buyer sends the purchase order to the supplier, who accepts and proceeds to fulfil the order. They may send a delivery note or packing slip with their shipment that lists the contents and quantities. The buyer will check the delivered goods against the purchase order and the packing slip to verify they match, taking note of any discrepancies as this should be reflected in the invoice.
The supplier sends the invoice to the buyer for payment. The buyer’s accounts payable personnel review the invoice, match it against the purchase order and the goods receipt and, if all is in order, pay the invoice according to the agreed terms. If the invoice doesn't meet their expectations, they'll have to go back to the supplier to resolve or rectify.
Why are purchase orders important?
Purchase orders are a significant document for companies because they:
Ensure legal protection
POs are an official legal agreement between the buyer and seller, which protects both sides.
Facilitate easier tracking
POs are often used as key reference points throughout the buying process so that buyers and sellers can track products and delivery times.
A PO process puts in place internal procurement controls and enables buyers to negotiate rates and terms with preferred suppliers.
POs are evidence of a placed order, but they can also act as a “shopping list” to help sellers determine if they have the right products in stock.
Purchase order format
Need to create your own purchase order? Here's the information you should include:
Start with your company details — name, business address, purchase order date and purchase order number.
Specify the recipient — seller company name, specific contact person and seller address.
State the shipping address, shipping method, terms and expected delivery date.
For each product, include the product code/SKU, name/description, quantity, unit price and delivery date.
Wrap up the purchase order by providing a cost summary — subtotal, applicable discounts, taxes, shipping costs and the grand total.
Common purchase order types
1. Standard purchase order
Standard purchase orders are the most common type of PO. The buyer knows exactly what they want, including the quantity and price, and lists that in the PO. For example, a pet shop owner running low on dog food might place a standard PO highlighting how much and when they need it.
2. Planned purchase order
Planned purchase orders are similar to standard POs, except the buyer isn’t sure what quantities they need. The PO works as an estimate with tentative delivery dates. If a florist doesn't know how many tubes of brown paper they need, for instance, they might make a PO indicating how many tubes they estimate they'll need and a flexible delivery date.
3. Contract purchase order
Contract purchase orders are the most formal type of PO and require the buyer and seller to sign a contract outlining the purchase terms. For example, a construction contractor might sign a contract PO with a building materials supplier to ensure they receive cement and bricks on the exact construction day.
4. Blanket purchase order
A buyer might place a blanket purchase order if they require the same shipment of goods from a vendor at regular intervals over a specific time period. Rather than issuing individual purchase orders for each transaction, a blanket PO establishes terms and conditions for multiple orders within the specified timeframe.
5. Digital purchase order
Electronic purchase order systems generate digital purchase orders. Online POs provide a digital way to track, search and monitor orders.
Best practices for creating a purchase order system
1. Maintain supplier master data
Maintain an up-to-date list of current suppliers to simplify the PO process. You’ll no longer need to waste time searching through email threads or phoning around to get crucial information.
2. Implement an approval process
Control your business spending by formalising an approval process for purchase requisitions. A purchase order system can auto-generate purchase orders to approved suppliers when managers have approved the purchase. A purchase order system removes the chance of lost or duplicated approvals.
3. Use digital PO software
Cloud-based procurement software organises POs in a central location. You can create, search and track POs from one place, whether you’re in the office or accessing the software remotely.
4. Automate the process
Most procurement software will allow you to automate the entire purchase order process. This saves valuable time (because staff don’t have to manually create new POs and wait for approval). It also helps make sure all necessary information is included on the purchase order and a digital copy is stored safely in company systems.
5. Create written guidelines
Write a guide to POs that you can circulate among your team. Use the guide to outline your procurement process and how you manage purchase orders within your company. Using a guide avoids miscommunication and means you can have better control over procurement.
6. Evaluate and tweak
Review your purchase order process often to see what’s working and what needs improvement. Track the total time it takes to submit POs and get approval from the supplier, and identify any bottlenecks slowing things down. Take advantage of your discoveries to make improvements.
Streamline procurement with MYOB
Streamline your procurement and purchase order processes with MYOB.
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With MYOB Advanced Business, you’ll always have the data and info you need to make the right business decision — and the features and functions needed to make it happen. Keen to find out more? Book a free demo with MYOB’s team today.
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