Purchase Order

What is a purchase order?

A purchase order (PO) is an official document that buyers create and issue to sellers, committing to pay the sellers for the sale of certain goods or services that will be delivered in the future. This PO document is sent with the intention of tracking and controlling the purchasing process.

Purchase orders will include a number for tracking purposes along with the type of item, quantity, and price agreed upon. Additional information can also be included in the PO. The more information the buyer includes, the more effective the purchase order becomes.

Once the seller accepts the PO, it becomes a legally binding contract. The purchase order document is typically created using purchasing software.

Generally, a purchase order doesn’t contain contract language. However, the Uniform Commercial Code or other related laws establish it as a contract by its nature. Nevertheless, it’s a common practice to accompany the approval of a purchase order with the terms and conditions of sale or a similar legal document.

A purchase order can help protect both the seller and the buyer. If a buyer refuses to make the payment, the seller remains protected due to the legally binding nature of the document. For the buyer to have a similar kind of protection, it’s crucial to have a purchase order confirmation.

Types of purchase orders

A purchase order is a crucial document when making large purchases and transactions involving the buyer and the seller, and because there are different types, it’s vital to issue the correct type of PO.

The following are the four types of purchase orders:

• Standard purchase orders (SPO): The most common type of PO and the easiest to comprehend. It’s used for one-off, irregular, or infrequent requests for goods and services. It contains the list of items and their quantity, delivery date, delivery location, and payment terms.
• Planned purchase orders (PPO): Similar to SPO, except they’re used when the delivery date is unknown or when the goods or services are anticipated for the future within a particular time frame. Dates of payment and delivery are loosely defined in a PPO, but they’re considered tentative.
• Blanket purchase orders (BPO): Similar to PPO, but omits the item quantity and sometimes the item price. This type of purchase order is used for the repetitive procurement of a particular set of items. It helps secure better pricing in return for the assurance of recurring purchases.
• Contract purchase orders (CPO): Similar to PPO and BPO, except the list of items required for purchase is omitted. CPO is the most complex type of purchase order and helps create a formal, long-term agreement between the buyer and the seller.

Benefits of purchase orders

Purchase orders enable businesses to rely less on verbal agreements and more on commercial legal documents. Although POs may seem like an extra piece of accounting paperwork, they have several business benefits.

Along with offering legal protection, a purchase order:

• Makes it easier to track orders
• Helps avoid audit problems
• Reduces time spent on the purchase process
• Helps control and track spending
• Enhances control of the procurement process
• Helps budget for specific projects
• Enables businesses to handle unexpected expenses
• Makes it easier to avoid duplicate orders
• Reduces the risk of internal fraud
• Improves delivery time
• Enable buyers to identify top-performing suppliers

The purchase order process

Having a well-defined purchase order process from the get-go can smoothen the procurement process and increase its efficiency. It’s useful for both buyers and suppliers and reduces the chance of miscommunication. 

Here are the steps involved in the purchase order process:

• A buyer decides to procure a product or service.
• They issue an electronic purchase order to the vendor via purchasing software.
• The vendor receives the purchase order and confirms whether they can fulfill the order.
• If not possible, the vendor informs the buyer and the purchase order is canceled.
• If possible, the vendor begins preparing the order by gathering the correct inventory or scheduling the needed personnel.
• The order is shipped or the services are provided. The vendor may use order management software to automate the order fulfillment process.
• The PO number is included in the packing slip so that the buyer knows which order has arrived.
• The vendor sends an invoice that consists of the PO number, making it easier to match with the delivery information.
• Depending on the payment terms, the buyer pays the invoice.

Purchase order best practices

Procurement is a costly business process. Its effectiveness can depend on the purchase order and can affect business success. Here are some best practices for sending purchase orders efficiently:

• Have clearly defined guidelines about who’s responsible for handling the company’s purchase orders. Otherwise, there’s a chance of duplicate orders.
• Make use of an electronic system like purchasing software to manage POs. This will eliminate unnecessary paperwork and make it easier to track orders.
• Include terms and conditions of the sale in the purchase order and specify each party’s responsibilities.
• Create and store PO copies.
• Set up a purchase approval process to control costs.

Purchase order vs. invoice

An invoice is an official payment request or reminder sent by the seller to the buyer once the order is fulfilled. It defines the confirmation of sale and lists the products or services that have been delivered, along with the amount of money that is owed. 

An invoice generally consists of the invoice number, seller information, payment date, and total amount due. Invoices are helpful in preventing overpayments and duplicate orders. Both an invoice and purchase order are legally binding purchasing documents, and they play a crucial role in commercial communication about purchases.

Purchase order vs. sales order

A sales order (SO) is created by the seller to confirm that they can provide the products or services requested by the buyer. Sales orders also confirm that the seller has reviewed and accepted the terms and conditions and other details of the purchase order, including quantities, pricing, and payment terms.

While an invoice demonstrates the date upon which the cost of products or services is being billed to the buyer, a sales order indicates the date on which the processing of a PO began. Also, a sales order is sent to the buyer as soon as the purchase order is processed.