How to create a purchase order
A purchase order is a document that outlines a buyer’s need for a good or service. Here's our full guide to understanding and creating purchase orders.
What is a purchase order?
Often abbreviated as “PO,” a purchase order is a legally binding contract a buyer sends a seller to authorize a purchase. Purchase orders usually contain all the critical information needed to complete a purchase, such as:
- PO number
- Relevant dates, like the date of the PO, expected delivery date, etc.
- The goods or services being purchased
- Business address and relevant contact information
Purchase orders are a way for buyers and sellers to keep a record of the details of purchases for reference. They can be used for inventory purposes or in case of misalignment or errors in the process.
Purchase order vs. invoice
Though often assumed to be the same, POs and invoices differ. Each serves a specific purpose in the buying and selling transaction process.
Purchase orders: POs are created by buyers and sent to sellers to authorize transactions.
Invoices: Once the seller receives a purchase order, they create an invoice that bills the buyer for the goods or services delivered.
Example of a purchase order
To help you get a better understanding of what purchase orders should look like, let’s take a look at an example:
Note the critical information included by the purchasing department:
- Company name and details, such as billing address
- Company’s delivery address (where physical goods are to be delivered)
- Purchase order number
- PO creation date
- Name of the person responsible for creating the PO
- Items being ordered (along with SKU numbers for easy identification)
- Quantity of items to be sent
- Pricing per item (based on your supplier agreement)
How does a purchase order work?
As an official document, a buyer sends to the seller, it’s a binding agreement that promises a seller will be paid to fulfill the requested goods or services.
A purchase order details the who, what, when, where, and how of a product or service being solicited. It tells the seller exactly what the buyer wants to be delivered and by when. Specifications like product types, sizes, or quantities of a good or service are outlined in a purchase order.
Though it is the buyer creating and sending a purchase order, it serves as a way to protect the interests of both parties and establish clarity. That said, several types of purchase orders fulfill different needs.
Types of purchase orders
Buyers within an organization (and small business owners using PO systems) should be aware of a few different types of purchase orders.
Standard purchase order (PO)
Standard purchase orders, or POs, are classic purchase orders. They’re great for last-minute or one-off purchases that must adhere to the company purchasing policies.
A standard purchase order is a detailed document that organizations use when they know exactly what they want and how they want it. A standard PO includes a list of the following details:
- Purchase terms and conditions
- Due dates and fulfillment dates
- Items and quantities they wish to purchase
- The price of each purchase tallied into a total purchase price (based on your supplier agreement)
- Delivery location
- Relevant party addresses and contact information
Blanket purchase order (BPO) or standing order
BPOs (blanket purchase orders), sometimes known as standing orders, are appropriate when a company knows of a good or service it needs but doesn’t necessarily know specifics like quantity or current price.
BPOs are useful when organizations don’t have forecast data to go off or unpredictable purchasing circumstances make knowing exact quantities difficult.
A BPO can include:
- A list of goods or services needed
- Terms and conditions for that order (including a fulfillment timeframe rather than an exact date)
- Relevant contact information
Indeed, a BPO isn’t as comprehensive as a purchase order. Still, it typically includes time frame limits so buyers can ensure the delivery of goods or services needed during that time.
Planned purchase order (PPO)
A PPO, or planned purchase order, outlines everything a standard purchase order contains except delivery information. PPOs inform the supplier of an upcoming order, so they can ensure they have stock on hand.
Until a release is given, the request for the goods or services can’t be fulfilled. Later, the buyer provides a release, which signals the expected delivery dates to the supplier and allows the supplier to fill the order.
Contract purchase order (CPO)
Consider contract purchase orders as documents outlining the terms and conditions under which a transaction will be made. Though they can include information similar to a typical purchase order, they generally do not require a specific list of goods and services.
Instead, a CPO is sent in anticipation of ordering goods or services from a seller. Once both parties agree to the CPO, proceedings continue with additional purchase orders that detail the buyer's needs. CPOs are a high-level way for buyers and sellers to get on the same page about the legal terms surrounding future purchase orders (remember, POs are legally binding documents).
Format of a purchase order form
All purchase orders have the same sections. Buyers fill the appropriate information into those sections to communicate a need for a good or service to a seller.
- PO date
- Purchase order number
- Company address and contact information
- Billing and shipping information
- Purchase order terms
- Delivery date and location
- Requested items and their description, quantity, and unit cost
- Cost of delivery
- Total cost for that purchase order
- Special notes or instructions
Steps in the purchase order system
While this process looks different in each organization, here’s a general step-by-step overview of how a purchase order system works
- A buyer realizes a need for a good or service through its internal procurement process.
- They draft a purchase order after collecting details from the appropriate department regarding that need.
- The PO is sent to the seller, and the buyer waits to hear if the seller can fulfill the order as specified.
- If the seller agrees to the order, the goods or services detailed in the purchase order are fulfilled, and the seller sends the buyer an invoice.
- The buyer reconciles the invoice and finalizes payment to the seller.
- The purchase order life cycle begins again for any new need.
It’s important to note that manual purchase order processes are time-consuming, error-prone, and harder to track. To simplify things, most businesses turn to procurement software.
Procurement software has features that help digitally manage purchase order creation, fulfillment, and organization. The use of SaaS tools for easing and streamlining business needs is expected to grow by 44 percent in the upcoming years.
As you think about your purchase order processes, it’s worth looking at your existing system and improving bottlenecks where possible. More often than not, a disjointed purchase order process can be remedied by an integrated procurement solution robust enough to manage the sending and approving of purchase orders and their subsequent invoices.
How to create a purchase order
Follow this simple PO process each time you need to create a purchase order:
- Start with a purchase order template. This makes the process more efficient, ensures consistency across POs, and prevents you from having to add the same details (like the email address of your accounts payable team) every time.
- Populate the purchase number. Your PO system should do this automatically if workflow automation is set up.
- Add the relevant vendor information.
- Detail the products you want to order, including purchase quantities and relevant codes.
- Add your expected delivery date. Some purchasing teams place sales orders in advance, so the due date might not be “ASAP.”
- Include any specific payment terms, like if you’d like to pay via credit card.
Beyond purchase orders
No doubt, purchase orders are a small but key component of the more extensive procurement process every business has to run.
Post-delivery, you must check that the invoice number, packing slip, and PO number align, a process called three-way matching. But that’s not all—you still have vendor best practices to uphold and relationships to forge.
Vendr helps you build automated purchase order workflows to speed up SaaS purchasing, simplify processes, and ensure compliance with internal policies.