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Purchase Order Guide: Everything You Need Know
Learn the fundamentals of purchase orders and how they play an essential role in procurement.
Whether you're running a small business or managing procurement for a global enterprise, one thing is certain - disorganized purchasing can quickly lead to chaos. From missed deliveries to overblown budgets, poor procurement practices can impact every part of your business. That’s where purchase orders come in. Often dismissed as just “paperwork,” purchase orders are actually the backbone of a well-run procurement process.
In fact, studies show that businesses with structured PO systems reduce maverick spending by up to 35% and improve invoice accuracy by 45% - making them a non-negotiable for finance and procurement teams alike.
In this blog, we will cover:
- What is a purchase order?
- Importance of purchase orders
- What are the different types of purchase orders?
- How does a purchase order work?
- Process to track a traditional purchase order
- Issues with the traditional way
- Transition to automated purchase order tracking
- Benefits of purchase orders
- Frequently asked questions on purchase orders
What is a Purchase Order?
A purchase order (PO) is a commercial source document issued by a business's purchasing department when placing an order with suppliers or vendors. The document includes all the details about the purchased items, such as the product code, pricing, and quantity. Overall, it is simply a contract created by the buyer buying goods from the vendor.
Importance of Purchase Order
As a business owner, the last thing you need is more paperwork. Not using the right purchase order can have implications for your business.
Purchase orders are more prominent in keeping an accurate and detailed financial record. They might seem an unnecessary extra step, but knowing how to use them in the right way can benefit your business in the long term.
If you're a small business owner or managing procurement for a large enterprise, the correct purchase order system can help make a big difference.
Keep reading to know more about the importance of having purchase orders in place for your business or company -
Offering Legal Protection - Purchase orders are legally binding documents regarding the prices and quantity of goods in your order, protecting you and the vendor or supplier. It's advisable to have a legal record of precisely what you ordered; a purchase order helps initiate that. Each document also includes a unique purchase order number, which makes tracking and referencing easier during disputes or audits. This will also safeguard you against mishaps, such as sudden price surging, the wrong type of items or quantity received, or being charged an incorrect amount.
Boost for Inventory Management — Buying goods is the first step in securing inventory. When you have a purchase order system in place, inventory management is improved in the long run. It helps keep track of what goods should be arriving, and then you can match them with the invoices to ensure the details such as types of goods and quantities. This will keep you informed about the status of your incoming inventory and improve visibility across your supply chain. This will keep you informed about the status of your incoming inventory.
Saves Time — Creating a purchase order document is crucial as it saves you time in the long run. To begin with, a well-established purchase order system with several features eases down the entire ordering process. Once the system is up, the experience will be hassle-free. A digital procurement system further enhances this process by automating repetitive tasks and reducing manual errors. Plus, after your orders arrive, you'll save time as you only have to check the invoice against the purchase order to ensure accuracy. The system makes everything you need readily available.
Avoid Any Mishaps — Purchase orders clearly mention a record of the goods and order details, protecting you from any kind of mishaps when ordering, such as someone getting a phone order wrong. You can always refer back to POs when there's any disagreement about the ordered goods. Having this type of documentation in place safeguards you against any goof-ups that might happen.
Budgeting Assistance — If you're handling a large project, purchase orders can help with budgeting. To generate the correct POs, you must be precise about the order quantities before the project starts. In addition to big projects, purchase orders also come in handy for daily purchases while running the business. They’re also helpful for budgeting goals by providing records of purchases. They’re also helpful for budgeting goals by providing records of purchases and maintaining a clear purchase history for future planning. This way, you’ll always be prepared to plan for future budgets.
Identify Performance Issues — If the bulk of the goods are not focused where you would like, a quick look at purchase orders will provide essential insights about performance. By analyzing the details of purchase orders, you'll learn what is selling well and what is not. This data will also provide knowledge on production and other factors that might influence your business.
Why Every Business Needs Purchase Orders
Purchase orders (POs) are more than just routine paperwork - they are essential tools that keep your procurement process running smoothly and transparently. No matter the size of your business, implementing a structured PO system helps ensure every purchase is tracked, approved, and documented properly.
Legal and Financial Protection
A purchase order acts as a legally binding contract between the buyer and the vendor. It outlines the agreed-upon terms - what’s being bought, in what quantity, at what price, and by when it should be delivered. Clear delivery schedules included in the PO help prevent delays and align expectations between buyers and vendors. This documentation helps resolve disputes over pricing, deliveries, or payments, providing a layer of legal protection for both parties.
Better Budget Control
Without purchase orders, it's easy for expenses to spiral out of control. A PO system enforces internal approvals, ensuring that purchases align with budgets and business needs. This level of oversight is especially useful during audits or when reviewing historical spend.
Stronger Inventory Management
POs make it easier to track what goods are expected and when. This helps businesses manage inventory more effectively by preventing over-ordering, stockouts, or duplicate purchases. When paired with invoice matching, POs also reduce errors in receiving and billing. When integrated with an ERP system, POs provide a unified view of inventory levels, procurement data, and financials.
Improved Vendor Relationships
Vendors appreciate clarity. A well-structured PO sets expectations upfront, reducing the risk of misunderstandings or delivery issues. It also allows your procurement and finance teams to build a reliable history of vendor performance, which can lead to better terms in future negotiations.
Operational Efficiency and Accountability
With a PO system in place, every request must go through an established workflow. This builds accountability into the purchasing process and makes it easier to identify inefficiencies or areas that need improvement. Many businesses now use automated systems to streamline PO creation, approval, and tracking—reducing manual work and processing time.
In short, purchase orders bring structure, control, and transparency to a chaotic process - making them indispensable for modern procurement teams.
Steps in the Purchase Order Process
A well-defined purchase order (PO) process helps ensure that business purchases are accurate, approved, and documented from start to finish. Below is a detailed look at each step involved in a typical PO workflow, from identifying needs to maintaining records.
1. Identify the Need for Goods or Services
The process begins when a department or team recognizes a requirement for a product or service. This could stem from low inventory levels, project demands, or maintenance needs. Clearly defining the requirement at this stage helps reduce unnecessary purchases and ensures accurate procurement.
2. Create a Purchase Requisition
Once the need is confirmed, a purchase requisition is generated. This is an internal document used to request the purchase of specific items. It includes key details such as product specifications, quantity, purpose, and estimated cost. This step acts as an initial checkpoint before committing to spend.
3. Approve the Purchase Requisition
The requisition is then reviewed by the appropriate stakeholders - often department heads, budget owners, or procurement managers. Approval ensures that the request aligns with business priorities and available budgets. Some organizations use multi-level approvals depending on the value or nature of the purchase.
4. Select a Vendor and Negotiate Terms
Once approved, the procurement team shortlists vendors based on price, delivery time, quality, and past performance. Once approved, the procurement team shortlists vendors based on price, lead times, delivery performance, and overall quality. Terms such as payment cycles, delivery timelines, discounts, and service levels are negotiated to get the best value. For recurring orders, businesses may opt for a blanket PO arrangement, allowing multiple purchases under one agreement.
5. Issue the Purchase Order
After finalizing the vendor and terms, a formal purchase order is created and sent to the vendor. Most companies use a standardized purchase order template to ensure consistency in the information captured across every transaction. This document includes PO number, buyer and supplier details, items ordered, pricing, delivery schedule, payment terms, and applicable taxes. It serves as a legally binding contract once accepted.
6. Vendor Acknowledgement
The vendor reviews the PO and confirms acceptance. Any changes, such as shipping delays or product availability issues, are communicated at this stage. Acknowledgement helps avoid surprises and sets mutual expectations for the delivery.
7. Delivery and Goods Receipt
The vendor fulfills the order and delivers the goods or services. Upon receipt, the buyer inspects the delivery for quality, quantity, and conformity to the PO. If everything matches, a goods receipt note (GRN) is issued and logged into the system.
8. Three-Way Matching (PO, Invoice, and GRN)
This crucial step ensures accuracy in payment. The PO, invoice from the vendor, and GRN are cross-verified. Any mismatch - like incorrect quantity or overbilling - is flagged and resolved before payment processing. This step reduces fraud and overpayments.
9. Payment Processing
Once the three-way match is successful, the invoice is approved for payment. Payment is made as per the agreed terms - often 30, 45, or 60 days after delivery. Various payment methods - such as bank transfers, corporate cards, or net terms - may be used depending on vendor agreements.
Timely payments help maintain good supplier relationships and may qualify you for early-payment discounts.
10. Record Maintenance and PO Closure
All relevant documents - the PO, invoice, GRN, and payment proof - are archived digitally or physically for audit and compliance purposes. The PO is marked as closed, signaling the end of the cycle. These records are also useful for budgeting, forecasting, and supplier evaluations.
By following each of these steps, businesses can bring transparency, accuracy, and control to their procurement process. A structured PO process not only streamlines operations but also reduces risk and ensures accountability at every stage.
What are the different types of Purchase Orders?
There are four main types of POs that businesses use based on different purposes and circumstances.
Standard Purchase Orders - These are the most common type of purchase order. They are created when a company is required to buy goods once. A standard purchase order will include the necessary information, such as payment and delivery details. These can be the best options when you are conducting one-off purchases and have fixed delivery dates and payment terms.
Planned pPurchase Orders - Similar to standard purchase orders, these are typically not used for one-time transactions. Instead, they cover the entire scope of an ongoing transaction, with payments and deliveries occurring in installments. For example, a company might plan to acquire 50 new Bluetooth speakers over six months but will issue specific orders for ten at a time as needed. This systematic approach allows businesses to strategically plan their procurement activities and manage their cash flow by spreading out payments instead of making a single large upfront purchase.
Blanket Purchase Orders - Blanket purchase orders are generally used for recurring purchases. They allow companies to request an indefinite quantity of a specific good from a vendor over an unspecified period. This arrangement includes an agreement to procure goods or services from the vendor, with detailed specifications to be decided later.
Contract Purchase Orders - Great for complex projects or ongoing services. They are legally binding agreements that outline the terms, conditions, and detailed scope of work expected from your vendors. By clearly defining expectations and deliverables upfront, contract POs help ensure compliance, minimize risks, and promote strong, long-lasting relationships with your suppliers.
Examples of Purchase Order
A typical purchase order acts as a blueprint for a business transaction, containing key details agreed upon by both the buyer and seller. It usually includes the buyer's company information, a unique PO number for easy reference, and a detailed list of the items or services being purchased, including quantities, individual prices, and total costs.
The PO also specifies the delivery address, anticipated delivery date, and any relevant terms and conditions. Payment details terms, such as when the invoice is due, are also outlined. Finally, the document features designated spaces for authorized signatures from both parties, indicating formal agreement to the purchase terms.
This standardized format ensures clarity and transparency, providing a comprehensive overview of the transaction for everyone involved in the procurement process.
Here’s an example of a purchase order from Unilever Australia to TKN PO Supplier 1 in London. The order details a request for 10 pieces of "Stuff1" and 5 pieces of "Stuff2" at unit prices of 10.00 AUD and 5.00 AUD, respectively, plus 10% tax. The total cost before taxes is 125.00 AUD, and the order was placed on 12/11/18.
How does a Purchase Order work?
Purchase orders (POs) are usually initiated and sent by the purchasing department within a company's procurement process. The information contained in the PO is then used to monitor shipments, facilitate payments, and integrate relevant data into the broader inventory management system for accurate record-keeping and maintenance purposes.
Here's a general outline of a typical PO process:
Step 1: Buyer Creates and Assigns PO Number - After an internal purchase request (PR) for inventory is approved, a purchase order (PO) is generated, containing essential details like a unique PO number. Some companies have a formal PR process prior to PO creation, while others may have a more streamlined approach based on their size and needs. Regardless, once the PO is created, it implies an internal approval process for the purchase requisitions.
Step 2: Supplier Reviews and Accepts PO - The buyer sends the PO to the seller, who can either accept or reject it. If details are incorrect, the seller can request amendments. If the seller cannot fulfill the original PO, it's canceled, and the buyer is notified. The buyer can then resubmit a PO with updated terms or find a new supplier. Upon seller acceptance, both parties are legally bound to the contract.
Step 3: Seller Issues Invoice - Depending on the PO terms, the seller may expect payment before, during, or after delivery. They will send an invoice to the buyer specifying the payment terms.
Step 4: Purchase Order Matching - The buyer reviews the invoice, verifying that the information aligns with the PO and any receipt details. This comparison process, known as purchase order or invoice matching, helps identify discrepancies before payment.
Step 5: Invoice Approval and Payment - Once matching is complete and any issues resolved, the invoice is routed for approval and payment is released to the seller. If the PO is fully fulfilled, it's closed. For partially fulfilled POs, it remains open, and the accounts payable team repeats steps 3 and 4 as needed.
How to track Purchase Orders?
Purchase order (PO) tracking involves monitoring the entire lifecycle of a purchase order, from its creation and transmission to the seller through acknowledgment, fulfillment, shipping terms, and, ultimately, receipt.
Process To Track A Traditional Purchase Order
One way to understand the history of purchase order tracking, is simply to analyze the traditional manual procedures and unrealistic expectations from end systems that have always been in place.
Instead, let's walk through an example process of one department ordering more stationary supplies.
Step 1 - When the company purchasing department contacts the department to purchase more stationery. When they buy, the first thing that triggers in them is whether this fits within their given budget.
Step 2 - When The request is approved, the purchasing department creates a purchase order from its stationery supplier.
Step 3 - The purchasing department then manually sends the PO to the paper supplier, usually via postal mail The task of order insertion and physical delivery now falls on the supplier.
Step 4 - Upon being emailed the PO the Department can ring supplier, advise them of PO number and ask for delivery status update.
Issues with the Traditional Way
Before automation, most purchase orders were created, tracked, and stored manually - using paper forms, spreadsheets, or email chains. This made the entire process time-consuming and error-prone. Paper-based systems lacked standardization, and documents were often misplaced, delayed, or duplicated.
Tracking and managing POs involved back-and-forth communication, delayed approvals, and scattered documentation. Finance, procurement, and operations teams often worked in silos, lacking a single source of truth. The result? Missed deliveries, duplicate orders, and frequent invoice mismatches.
Here’s a quick comparison of manual vs. automated processes:
As purchasing becomes more strategic, the traditional way simply can't keep up. The next section explores how automation solves these challenges.
Transition to Automated Purchase Order Tracking
With advancements in procurement technology, the PO process has become faster, smarter, and more transparent. Automated purchase order tracking allows teams to monitor every step of the order lifecycle - from requisition to delivery - on a single digital platform.
Modern tools integrate directly with supplier systems and inventory management software, enabling real-time visibility into order status and shipment movement. Alerts and notifications can be set up to inform stakeholders of approvals, delays, or changes - reducing the need for manual follow-ups.
Automated workflows streamline approvals, improve data accuracy, and ensure that POs are created, updated, and closed on time. They also enable centralized document storage, making audits and historical tracking much easier. Most importantly, automation empowers procurement and finance teams to make faster, more informed decisions - ultimately driving greater efficiency and cost savings.
Here’s a quick comparison of how purchase order tracking works in a manual vs. automated setup:
Benefits of Purchase Orders
Purchase orders offer numerous advantages for both buyers and sellers. They streamline procurement, improve budget management, and foster better communication overall.
Let's take a quick look at the key benefits of utilizing purchase orders -
Seller Performance Tracking — The Purchase order creates a valuable audit trail by documenting intricate details such as order date, promised delivery date, ordered quantity and price, received quantity and date, and invoiced quantity and price. By analyzing this data, you can gain insights into which vendors consistently deliver on time, within budget, and without any human error. This enables you to recognize the top-performing suppliers and make informed decisions about future formal contracts for your business.
Serves As Significant and Formal Documentation — The purchase order is important because it provides a written and legal document recording the details of the entire purchase transaction. This ensures clear communication of expectations and minimizes the potential for misunderstandings or disputes between your business and the seller.
Preventing Duplicate Orders - As your business expands and manual purchase requests multiply, tracking who ordered what, when, and from whom can become increasingly difficult. Accidental duplicate orders can also occur, adding to the confusion. Implementing a consistent purchase order system for all purchases helps mitigate duplicate spending. By creating a searchable digital record of every transaction, POs provide a comprehensive view of your spending, making errors less likely and ensuring better control over your procurement process.
Spend Smarter, Automate Your Purchase Orders with Spendflo
Managing purchase orders can be a complex and time-consuming process. If handled poorly, it can negatively impact your business's financial health. Spendflo offers a solution to this challenge by providing the right tools to optimize your PO management.
By transitioning to Spendflo, a cloud-based platform, you can automate every step of your purchase order process, minimizing the risk of errors that often cause operational delays.
Spendflo's key features include:
- Streamlined approval workflows: Simplify and expedite approvals for faster processing.
- Real-time budget tracking: Maintain clear visibility into your spending and budgets at all times.
- Hassle-free integration: Easily integrate Spendflo with your existing financial systems for a unified workflow.
These features ensure a user-friendly experience while providing enhanced control and transparency throughout your procurement process.
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Frequently Asked Questions on Purchase Orders
How does a purchase order work?
A purchase order (PO) outlines the details of a transaction, specifying the list of items a buyer agrees to purchase, the agreed-upon price, delivery date, and payment terms.
How does a purchase order get paid?
A buyer initiates the process by creating a purchase order for a vendor to fulfill. The vendor then issues an invoice for the purchased items or services. Typically, the buyer pays upon receiving the invoice. However, in some cases, processing payment may occur after the shipment arrives, as per the agreement outlined in the purchase order.
What is a vendor invoice and its relationship to a purchase order?
A vendor invoice is a document sent by the seller to the buyer, usually accompanying the goods. It provides a detailed breakdown of costs for the list of items mentioned in the purchase order. The invoice should match the PO details to ensure accuracy and facilitate payment processing.
What is a goods receipt and how does it relate to an effective purchase order?
A goods receipt, also known as a packing slip, is a document detailing the contents of an order shipped by the seller. The buyer uses it to verify that all items listed on the PO are present in the shipment.
Can a purchase order be canceled?
Yes, a purchase order can be canceled after issuance, as long as the vendor still needs to be paid. The buyer responsible for issuing the PO would typically handle the cancellation request.
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