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Contents

  1. 1. What is a purchase order?
  2. 2. Why do businesses use purchase orders?
  3. 3. Purchase requisition vs purchase order: what’s the difference?
  4. 4. How does the end-to-end purchase order process work?
  5. 5. What information does a purchase order form contain?
  6. 6. Types of purchase order
  7. 7. Why are purchase orders important for small businesses?

What is a purchase order?

January 26, 2023
When running a small business, the chances are you’ll need to buy products and services. You get in touch with your suppliers and tell them what you need. They then provide it and you pay for it. Sounds simple, doesn’t it?In theory, yes, but the process of purchasing and supply can be much more complicated, as well as carry commercial risk. Problems can range from payment issues to supply shortages and delays caused by communication or scheduling errors. Using purchase orders is a way of making the process both professional and hassle-free.In this post, we’ll provide a definition of a purchase order, explain how they work and outline how a structured purchasing process can help small businesses.

What is a purchase order?

According to the Chartered Institute of Purchasing and Supply (the world’s largest professional body for Purchasing and Supply Management), a purchase order is:

‘A commercial document issued by a buyer to a seller confirming the goods or services required together with the quantity and specification needed.’Much like your ‘trolley or basket’ on an e-commerce site, a purchase order is simply a list of what you want to buy. It lays out the buyer’s requirements, including quantity, product type, delivery details and payment terms. It’s a vital tool in the process for both ordering and managing stock.Purchase orders are also legally binding contracts, which are intended to hold both the buyer and the supplier accountable. In the event of any disagreement between the two parties, having a paper trail in the form of a purchase order can help to iron out any misunderstanding or discrepancy.

Why do businesses use purchase orders?

When most small businesses first start out, they tend to use a more informal approach to manage their supply requirements. However, as they start to grow and their purchasing needs become greater, this can lead to errors and confusion.Below are some of the main advantages for using purchase orders to help with your supply management:As purchase orders are legal documents, removes any ambiguity by bringing both parties together in a mutually-binding contract. Once a vendor receives and acknowledges receipt of a purchase order, you are then both legally bound to your end of the order.Note: A purchase order only becomes a legally binding document once it has been acknowledged – this means signed by the supplier and sent back to the buyer.

Keep track of your orders

Using purchase orders will also help you to keep on top of all the goods and services your business has ordered, ensure you have a written record of how you’re paying for them and track their delivery dates.Each order will also be assigned its own individual purchase order number (PO number), helping you keep track of how many orders you’ve raised, as well as having a unique number to use in all correspondence with the supplier.From an accounting perspective, you will also be able to budget with confidence knowing that you have a contractually-enforced purchase price.

Auditing made simple

Should your business be audited, having a clear PO system in place helps form a neat audit, trail from purchase order to order acknowledgement, with delivery notes and invoices all displaying a clear number that creates continuity.

Help your suppliers help you

The chances are, your suppliers will be used to receiving purchase orders. If you use them too, it will make the process more straightforward, as all the information they need will be listed on the purchase order form. This will then in turn reduce the number of queries and speed up order processing, meaning you may benefit from a reduced lead time too.

Purchase requisition vs purchase order: what’s the difference?

In the world of purchasing and supply, you may hear mention of a purchase requisition form. However, they’re not the same.While a purchase requisition is used to get internal permission from business owners or finance departments to buy goods and services, a purchase order form is the document used – whether a paper or electronic purchase order — to actually order the goods or services from the supplier.

How does the end-to-end purchase order process work?

To make it easier to wrap your head around, here’s a step-by-step guide to a purchase order system:
    A business identifies a need to purchase goods or services. Some businesses may raise a purchase request at this stage in the process.If the requirement is approved by the finance or purchasing department, one or more quotations will be obtained from the potential suppliersOnce the price is agreed a purchase order form is created, containing all the details of the item(s) to be purchased, to be sent to the supplier.The supplier receives and formally acknowledges the PO – this is when the purchase order becomes a legally binding document.Depending on the agreed payment terms, the buyer will either send payment before delivery (pro-forma payment) or after receipt of the goods.The vendor will deliver the goods, along with the invoice – these will be checked by the buyer to ensure the information on the two documents matches up before payment.
For more on payment before delivery, check out our post on pro-forma invoices.

What information does a purchase order form contain?

You can create your own purchase order form in Excel, download a purchase order template online, or use accounting software to automatically generate a purchase order for you to use.A purchase order should contain the following information:
    Purchase order number, or PO number and date of issueVendor information, such as company name and invoicing addressBuyer information, such as company name, billing address and shipping addressAdditional contact information, such as phone numbers and email addressesDelivery due dateShipping method and termsOrder details, including the quantity of items, descriptions of the items (including, if applicable, the manufacturer’s reference) and the item unit priceAgreed price and payment termsTotal price, complete with taxes

Types of purchase order

Depending on the requirements of a business, there are 4 different types of purchase order that can be used to manage both one-off and regular purchases.

Single-use purchase order

This is the simplest and most straightforward type of purchase order. Each order has its own individual reference number and a separate order will be used for each purchase.

Blanket purchase order

Also sometimes referred to as a call-off order, blanket purchase orders give the buyer more negotiation power with the vendor to gain volume pricing discounts.The order is raised for the full quantity required, but separate lines raised for scheduled deliveries – or call-offs for a number of deliveries to take place over a period of weeks or months.

Contract purchase order

A contract purchase order is used when a buyer and vendor enter into a contract before a purchase order is created.Both parties will have first agreed a contract that outlines the details and terms and then this is followed up with a purchase order from the buyer containing these exact details. This type of order provides enhanced legal protection to both parties in the event of any discrepancies later on.

Planned purchase order

Also sometimes referred to as a scheduling agreement, this is used when a buyer forecasts future demand over a longer period than a standard purchase order or blanket purchase order. It will contain similar information to a standard purchase order, but delivery dates and quantities may be estimated, rather than firm.

Why are purchase orders important for small businesses?

The main advantage of purchase orders is that they reduce business risk, simplify the procurement process and provide a clear record of the goods purchased and when. This in turn will help to make business operations efficient and organised.It helps vendors too, as they will be able to check that they are able to provide the requested goods and services before they commit to delivery.Finally, using purchase orders for your business needs will help you to keep accurate and detailed records for audit and accounting purposes.
Caroline Wire
Caroline WireFreelance Copywriter

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