Everything You Need To Know About Purchase Orders

What Is A Purchase Order?

An obvious starting point would be to answer the obvious question, what is a purchase order? Purchase orders (POs) are documents sent from you, as the buyer, to a supplier with a request for products or services as an order.

Each PO will include a number for tracking the purchase order throughout the system, as well as the type of item (with identifying SKU if required), quantity, and agreed upon pricing. More specific orders will include more details, but as a general rule, the more information you include, the more effective your PO is.

Here is an example of a purchase order document:

Legal Status Of A Purchase Order

Buyers should always clearly communicate requests to sellers to reduce or eliminate confusion when the seller receives the PO.

If buyers ever refuse payment, the seller remains protected because of the legally binding contract status of the document. For the buyer to have similar protection it is important to have a purchase order confirmation, or acceptance of the order, tracked.

Ensuring you have robust purchase order terms and conditions covering all relevant scenarios, including details like when you can cancel a purchase order, will ensure clear boundaries to maintain good relationships with your key suppliers.

As legal documents some commercial lenders will use POs for reference when providing financial assistance to your organization, this is called purchase order financing.

A PO, once accepted by the vendor or supplier, is a legally binding contract between the two parties.

The Difference Between Purchase Orders and Invoices

Buyers create the purchase orders, and sellers create the invoices. Sellers may send an invoice as a way to collect payment – where there are specific payment terms (net 30, net 60, FOB, etc.) or may send an invoice with a zero balance as a way to record that a payment has been received for the order.

Both purchase orders and invoices contain similar information, such as a billing address, and shipping address. Invoices typically reference the purchase order number, with the addition of an invoice number to confirm that both documents are related and correspond with one another.

A key difference is the order details and other technical information included in the purchase order generally are not included on the invoice.

How Do Purchase Orders Work

John, the purchaser, has received word a department within his organization requires a new set of monitors for the computers in the office. He creates the purchase order that details the quantity and specific requirements for the monitors.

The company responsible for selling the monitors receives the order. Once they confirm they’re able to supply the order, they approve the PO and take the payment, or send the merchandise with the expectation of payment based on the previously agreed upon payment terms.

Once payment is received, order fulfillment happens and the monitors are shipped with the delivery date and tracking information, and John receives the invoice.

The invoice either confirms the payment that was sent before the merchandise shipped or includes the payment due date if money wasn’t sent first. John checks the invoice to make sure it matches the purchase order, then checks the packing slip to make sure all items ordered were received, and payment is only issued for items ordered and received, in a process known as three-way matching.

Purchase Orders are often confused with other types of documents too. It is important to understand the differences between purchase orders and contracts, the differences between purchase orders and work orders, and the differences between purchase orders and sales orders.

Tracking Purchase Orders

It is important to track purchase orders through the whole procurement process, for goods and services, to ensure you receive the goods or services you order and you only pay once for these items.

A sole trader or small business might start out with purchase order tracking in excel while using a purchase order template form, or even worse in a duplicate or triplicate purchase order book.

The more people involved and the greater the volume of POs being processed multiplies the number of problems that may occur. Implementing purchase order software will cover the need to track all purchase transactions, manage the entire PO process, and a lot more. Ensuring a full audit trail related to every purchase while enforcing purchase order best practices.

An ability to track and easily report on all types of purchase orders, including blanket purchase orders, is a must to get full visibility on spend. It also enables finance departments to streamline the purchase order reconciliation and payable process. Visibility on the entire process, including an automated open purchase order report, will ensure time is saved and nothing is missed when invoicing.

Digital transformation is a key goal for many organizations and procurement transformation is a key part of that larger goal. An online PO system will track electronic purchase orders through the entire process. You don’t need a dedicated purchasing department to feel the benefits of digitization.

Why Purchase Orders Are Important for Your Business

There are many organizations that don’t use purchase orders because they feel like the paperwork is just a roadblock or unnecessary step in the process because they have steady working relationships with vendors.

When small businesses are still in the startup phase, business owners tend to have a fairly organic purchasing process that’s simple and straightforward. But, as the company grows, and more hands are involved from start to finish, the process changes as the relationships with vendors grow and evolve with time.

At a certain point in company growth, purchasing demands become more complex, urgent, or specific, meaning communication can become difficult and leave plenty of room for error if purchase orders are not used, or lack a certain level of detail.

If a buyer receives their order without a PO number for reference, it can be a hassle to figure out where the request went awry. And at that point, it’s likely that both an invoice and payment was sent – adding more complexity to the legal situation between the two parties.

The purchase order serves as a legally binding document offering legal protection, providing clear instructions to the vendor and an audit trail that’s available for reference when things go wrong.

Why You Need to Automate the Purchase Order Process

If your business is currently using a paper-based system, chances are you’re creating too many documents. Many companies will process up to seven documents over the course of the purchasing cycle, including requisitions, purchase orders, quotes, order acknowledgments, goods received notes, packing slips, and invoices.

That’s a lot to keep track of, and when you consider you have to keep track of all of this for every single purchase, relying on paper becomes a bit overwhelming. Better purchase order management is needed.

Good record keeping is essential for purchasing and procurement, but paper-based records can easily be lost, damaged, or destroyed. It’s more difficult to find duplicate requests and purchases, invoices, and missing transactions, which cost your company both time and money.

Paper-based systems also require using an efficient filing system that’s regularly updated. This filing system will take up considerable space in an office, only growing over time, and take up man hours to maintain and keep running smoothly.

Automating your purchase order process with a purchase order software such as Planergy digitizes the entire procurement process by using electronic purchase orders and other documents.

All the important documents are tracked in a centralized system with an audit trail to tell you who takes what actions on the document. Plus, you can upload other documents to vendors and purchase orders, such as prior contracts, additional terms, and payment schedules, to keep track of all your vendor information and other details with ease.

With purchase order automation everything’s stored in a single system, the accounts payable department benefits as well, since it becomes easier for them to convert orders into invoices for payment, for easier payment processing.

How to Integrate Purchase Orders into Your Business

Begin by evaluating how your business currently handles purchasing and then consider how you’d like to control what your team can buy and how they’d process the entire purchase process. After that you will be able to create a purchase order system that is suitable to your company’s needs.

Purchase Requisitions and Purchase Orders

If your organization isn’t currently using purchase orders, it’s likely that you’re not managing the process your employees follow when they want to buy something. By switching to an electronic purchasing system, you’ll be able to create a formal purchasing process that controls who is able to buy what and how much money they can spend without further approval.

For purchase orders with a higher value effective purchase order control should be set in place with purchase order approval workflows to ensure the right people sign off before the commitment is made.

Ultimately, the increased control and visibility into your company’s spending habits will give you the ability to make data-driven decisions for the betterment of the organization.

Start by using requisitions, that allow your team to make a formal request for the materials or things they need to do their job. You may already be doing this – simply asking your team to email their manager with the request, then having the manager make the purchase.

Instead, creating a standardized purchase order request form and requiring all employees to use it, ensures receiving requisitions isn’t a waste of anyone’s time. It has all the information people need to approve the requisition and automatically attaches it to the corresponding purchase order when the requisition is approved.

Budgets

Once your staff starts using the standardized purchase requisition, you’ll be able to create budgets based on the average monthly spend and track what it is your team is buying. With this data, you can start looking at how the supplies are used and start finding savings opportunities.

People you designate as approvers will be responsible for maintaining the budget, and if people go over the budget, the approver may not be able to approve any purchase requisitions that aren’t absolutely necessary for immediate needs. Real-time expenditure vs budget information will ensure the approval process for PO creation is better controlled.

Volume Discounts

Once staff members start submitting requisitions, approvers can easily spot purchasing patterns. This allows them to submit bulk orders and request volume discounts, if available. When requests are created digitally, processing time is significantly reduced, since the most frequently requested items can be added to a catalog from the best supplier for the best possible price.

Moving from Requisition to Purchase Order

After purchase requisitions are a standard process in your business, you move on to creating purchase orders from those requisitions. You’ll need to contact suppliers to let them know you’ll now be submitting a formal purchase order before sending payment. Suppliers likely won’t complain about this as it has significant benefits to both parties.

When your approvers have requests that need to be fulfilled, the purchaser will complete the necessary purchase order form and send them to the vendor. The vendor will then communicate any concerns or issues they have with the purchase if there are any. If not, they will ship the order and invoice once they’ve received payment.

With an e-procurement system, it’s easy to convert a requisition to a purchase order. The requisition number is attached to the purchase order number, so you can track the purchase from request to receiving and payment. Once the approver marks the requisition approved, it can automatically be converted to a purchase order with the vendor the requestor selected.

Integrating requisitions and purchase orders may take some time to adjust and standardize. But, doing so increases your ability to track expenses and remove hassles associated with purchasing. Visibility into your company’s spending habits is critical to sustaining company growth, and this process is one of the ways you can achieve it.

Chances are that if you’re reading this, you’re interested in procuring goods for your business. 

If you want to obtain goods from suppliers in a smooth, predictable and organized fashion, using purchase orders can certainly help. 

In this article, you’ll learn:

Let’s dive in!

Need a purchase order template?

You’re in luck! Download our free purchase order template to help standardize your ordering process, ensure accurate record-keeping and save time.

What is a purchase order?

A purchase order (PO) is an official document that’s issued by a vendor to pay a supplier for the sale of a list of specific products or services that will be delivered in the future.

Typically, a PO includes the types, quantities and prices of the products or services being purchased by the vendor. The more specific an order is and the more details a vendor includes, the more effective the PO will be. 

Once a supplier accepts a vendor PO, it forms a legally binding contract between the vendor and the supplier. That’s why it’s important for vendors to include as much pertinent information as possible in their POs.

Purchase orders are incredibly useful for controlling and documenting the purchase of products and services from external suppliers.

What is a purchase order number?

Each PO has a unique purchase order number associated with it that helps both vendors and suppliers track delivery and payment.

What is a purchase order used for?

One of the key benefits of purchase orders for vendors is that they can place an order without needing to immediately pay for the order. For suppliers, a PO is a way to give vendors credit without any risk, since the vendor needs to pay once the products or services are delivered. 

What are the benefits of purchase orders?

Along with the cash flow benefits, there are a few other reasons why POs are so beneficial for vendors and suppliers alike: 

• Greater accuracy

  for inventory and financial management. 

• Improved budgeting

  because funds need to be available prior to a PO being issued. 

• Quicker delivery

  , since POs help a vendor schedule deliveries for when they need it. 

What are the cons to purchase orders? 

We can go on record and say that POs have a lot more pros than cons. As far as cons go, there are a couple:

• More paperwork for smaller purchases.

• From a strictly financial perspective, using a credit card can serve the same purpose.

But if you want to keep your financials and inventory management organized and accurate, purchase orders are the way to go. 

How does a purchase order work?

A PO is meant to simplify the purchasing process between vendors and suppliers. While each retailer’s process can differ, here’s an example of how a typical purchase order process looks: 

1. The vendor decides to purchase a product for their business.
2. The vendor issues a PO to the supplier, oftentimes electronically using a purchase order template.

3. The supplier receives the PO and confirms to the vendor that they can fulfill the order. If not, the supplier lets the vendor know and the PO is canceled. 

4. If the supplier can fill the order, they start preparing the order by pulling the requested inventory and scheduling personnel to package and ship the order. 

5. The order is shipped to the vendor’s specified delivery location with the PO number on the packaging list.

6. The supplier invoices the vendor for the order using the PO number so that it can be quickly matched with the shipment’s delivery information. 

7. The vendor pays the supplier according to the invoice terms specified in the PO. 

How to create a purchase order

While each business is different, most POs will include: 

1. Company and vendor name
2. The quantity being purchased
3. The product or service being purchased

4. Brand names, SKUs or model numbers

5. The price per unit

6. Delivery date

7. Delivery location

8. Billing address

9. Payment terms (such as payment upon delivery or within 30 days after the vendor receives the order) 

What does a purchase order look like?

Purchase orders are typically a standardized document that contains company information (name), shipping details (delivery and billing address), supplier information (name and address) and order information (product, price, quantity, delivery date and payment terms).

Many retailers opt for standardized purchase orders to maintain consistency between them and their suppliers.

How to create a purchase order in Lightspeed’s Retail POS system

Lightspeed Retail POS has robust inventory management capabilities to make merchants’ lives easier. 

Merchants can create and send purchase orders to vendors in one place, with no clunky Excel spreadsheets necessary. 

If you’re interested in seeing how to batch import items into a purchase order, set automated reorder points or build special orders, check out our Help Center article on creating purchase orders for a step-by-step walkthrough. 

What’s the difference between a purchase order number and an invoice?

The main difference between a PO and an invoice is who creates the document. A vendor creates a PO, which needs to be fulfilled by the supplier. A supplier prepares an invoice for the order and issues it to the vendor.

For example: Let’s say a clothing store is running low on t-shirts. The retailer (vendor) prepares a PO that lists exactly what types of t-shirts they want (size, color, quantity, price, SKU number) as well their desired delivery date, delivery location and billing address.

If the supplier can fulfill the PO, they will accept the order, which forms a legally binding contract between the vendor and supplier. Once the vendor receives the goods they ordered, they initiate a payment to the supplier for having provided the products or services specified in the PO.

So, in a nutshell, a PO is for a vendor to order products, whereas an invoice is for a supplier to get paid by the vendor for supplying the products. 

The 4 types of purchase orders

While you may think that all purchase orders are the same, that’s not the case. There are actually four types of purchase orders that a retailer can use, each with their own use cases and benefits. 

1. Standard purchase orders

Just like the name suggests, standard POs are the most commonly used. In a standard PO, the vendor specifies:

• What items they’re buying

• The quantity of each item they’re buying

• The delivery location and date

• Payment terms

2. Planned purchase orders

When a vendor places a planned purchase order, they anticipating their future needs for an item and submitting a PO in advance. In a planned purchase order, the vendor specifies:

• What items they’re buying

• The cost of those items

• The delivery location

• Payment terms

For planned purchase orders, the quantity of items is based on an estimation and delivery dates are tentative, usually within a set timeframe (for example, anytime between November 1 – 15).

3. Blanket purchase orders

A blanket PO is a commitment from a vendor to buy products or services from a supplier on an ongoing basis until a specified order value is reached. Usually, the vendor places multiple orders at the same time to benefit from preferential pricing. 

4. Contract purchase orders

With a contract PO, both the vendor and supplier sign a contract that specifies the terms of the purchase before a purchase order related to the contract is issued. While the penalties for breaching a contract purchase order vary, both the supplier and vendor have the ability to take legal action should the other party not fulfill their end of the contract. 

The main benefit of contract POs is that they offer more legal protection for both vendors and suppliers. Typically, we see contract purchase orders for large orders where vendors want legal backing should a supplier make errors, or suppliers want assurance that the vendor will pay them in a timely fashion.

How to manage purchase orders

While POs can be relatively straightforward, they can still add complexity to your supply chain process if you’re not accustomed to using them. For retailers, it’s important to invest in solid inventory management software and find a process to manage suppliers that works for you. 

Here are a few tips for managing purchase orders:

1. Use technology to streamline inventory management

The best thing you can do for managing purchase orders is investing in a retail point of sale system with great inventory management capabilities. Lightspeed Retail POS has integrated vendor catalogs and merchants can create and send POs within the system. Best of all? Everything is documented and stored on the cloud, so you never lose important information. 

2. Order in bulk to lower costs (if you can)

By ordering items in bulk, vendors can benefit from preferential item pricing and a lower cost per unit. Of course, by ordering in bulk you’re spending more upfront, so you should only explore this option if your business is stable and you’re confident you can sell the merchandise. 

3. Be timely to foster great relationships with suppliers

Always send your purchase orders, invoices and contracts in a timely manner. Not only will that assure that you have a predictable, steady flow of the inventory you need, but suppliers will appreciate your professionalism, have confidence in your ability to pay them and want to continue working with you.