Purchase Order: What It Is and How to Create One

A purchase order is a legal document that outlines a purchase agreement between buyer and seller. Become a PO expert quickly with our complete guide.
Written by:  Mark Saltarelli
Last Updated:  June 14, 2024
Purchase Order: What It Is And How To Create One

Every business relies on a steady flow of supplies, materials, and services to ensure that things run smoothly and production is consistent. The process for ordering supplies should be similarly streamlined.

When your stakeholders need something delivered, they need an efficient way to communicate that need and have it filled. In most cases this communication will come in the form of a purchase requisition, followed by a purchase order for the approved price.

The purchase order is more than an order form. Today we will look at the importance of creating firm purchase orders, tracking, and driving a successful procurement process using a well-structured purchase order system.

Download the free tool: Purchase Order Template

What is a purchase order?

A purchase order (PO) is a legal document between a buyer and a seller to purchase specific quantities and qualities of goods and services. While purchase orders are commonplace within virtually every place of business, there’s a lot more to the purchase order process than simply filling out a form.

The purchase order represents a specific agreement in price and terms for a transaction. Once accepted, a purchase order is a legally binding contract. It obliges the supplier to provide the quantity and quality of goods outlined in the purchase order within an agreed-upon timeline, and requires the buyer to pay for them upon receipt.

The specific terms of a purchase order also offer legal protection for both parties. For this reason, it’s important to maintain a high level of compliance with your supplier purchases.

How does a purchase order work?

In a healthy procurement process, every purchase follows a predictable and traceable workflow. The purchase order is part of the second phase of the procurement cycle. In this phase, the details of the deal have been agreed upon and approved, and the finalized order is submitted.

The steps of this phase are as follows:

1. Stakeholder request is approved

In an ideal system, every purchase begins with a purchase requisition submitted by a stakeholder who has identified a need. Using the purchase requisition information (sometimes called an intake form), departmental stakeholders route the request through approval workflows and green-light it for fulfillment. 

2. Buyer drafts a purchase order

Once approved, the buyer drafts a purchase order outlining the agreed-upon items and terms, including every detail of the order and all the information required by the supplier to complete sale and delivery. 

Purchase orders can be developed and delivered electronically. In this case, all transaction details can be automatically tracked, and the data used for later spending analysis and reporting.

3. Seller reviews and approves

Once transmitted, the seller will review the purchase order for any discrepancies. They will also confirm their ability to deliver the correct quantity of specified items within the agreed-upon timeframe. The seller will then approve the PO and begin fulfillment. With electronic purchase orders, it may be possible to automatically track the fulfillment and delivery process.

checking purchase order

Purchase Order Template

A purchase order template creates a repeatable, reliable process for processing and tracking your orders. Take advantage of our easy PO template here.

Download the tool

4. Order fulfillment and reconciliation

The order fulfillment and reconciliation process should follow the terms and timeline in the purchase order. Once delivered, the buyer will receive and approve the delivered goods. Buyers should note any variance between a purchase order and the goods delivered. 

If an order cannot be reconciled, the buyer has the option of returning the delivery if the seller cannot remedy the issue. Once reconciled, the invoice generated during the fulfillment process is forwarded to accounts payable for completion.

5. AP issues payment

Accounts payable will conduct a second check of the purchase order. They will match the invoice, purchase order, and purchase requisition to ensure they are identical. This process is called three-way matching. Automation can handle three-way matching in the background for electronically processed orders. Once this is complete, accounts payable submits payment to the supplier to complete the transaction. This is all part of the purchase to pay process.

6. Supplier enters evaluation cycle

While payment to the supplier is the end of the transaction, in high-performing procurement organizations, it’s not the end of the procurement process. Data from each transaction and each supplier is maintained in a system so suppliers can be evaluated. Any variance or exceptions to compliance are noted within the system. 

Periodic supplier evaluation provides a high level of confidence in pricing terms, reduces the occurrence of third-party risk, and ensures that your purchasing process remains efficient and financially competitive. The evaluation cycle also includes supplier onboarding, offboarding, and general contract management.

The difference between purchase orders and invoices

Purchase orders and invoices are both part of the procurement process when purchasing supplies. However, they are different documents and should be treated as such:

  • A purchase order is an agreement to purchase. The buyer transmits this contract to the seller to initiate a purchase.
  • An invoice is a request for payment after successful delivery. The supplier transmits an invoice to the buyer to initiate payment.

Types of purchase order

While most people think of a PO as being a single document, in reality there are several types of purchase order used for specific purposes. These are the four types of purchase order every stakeholder should know:

1. Standard

Most stakeholders are familiar with the standard purchase order. This form is used to outline a one-time purchase of a specific quantity and description. The standard purchase order has a definite time for performance and specific payment amounts and deadlines. It must contain all the necessary information to complete a transaction before it is transmitted.

2. Planned

A planned purchase order is similar to a standard purchase order in that it contains specific quantity, quality, and agreed price information for the purchase. However, a planned PO does not have a specific date for fulfillment. For example, a buyer planning a future purchase may draft a planned purchase order and submit it to AP in advance to secure the funds needed for the purchase. In accounting terms, this security is called an encumbrance. Once the purchase is ready for completion, the encumbrance is released, and the funds are available to complete the transaction.

Manager interested in details

Purchase Order Template

A purchase order template creates a repeatable, reliable process for processing and tracking your orders. Take advantage of our easy PO template here.

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3. Blanket

A blanket purchase order is useful when a business requires a certain item or items on an ongoing basis. Using this type of PO can reduce the repetitive work of writing up orders for the same item every time you need it. It outlines the product and quality without including quantity or timeframe. Some standard office supplies such as paper, printer ink, and other consumables are managed under blanket purchase orders to create flexibility with a supplier. Often these POs are written with the understanding that the supplier may not be able to fulfill the entire order. For this reason, a maximum purchase quantity is sometimes written into the agreement. 

4. Contract

A contract purchase order is the least specific type of PO. The contract outlines only that the buyer wants to purchase goods at some point in the future, and promises to commit to a certain supplier for the transaction. A contract purchase order establishes future terms for the purchase without the need or specifics. It is somewhat like a placeholder, establishing a future agreement to be made between the two parties.

How to create a purchase order

Create a purchase order template for use in your PO system—it will serve for every transaction you complete and speed up your workflow. You can use the following information to build a template for all your purchase orders:

  • Header: This contains information about your company, including business name, address, buyer name, and contact information. 
  • Vendor information: This area is for supplier information, including company name, address, sales rep name, and contact information. 
  • Purchase order information: This information helps with tracking the status of the order and tying the payment to the invoice and purchase requisition. It includes the PO number, PO date, vendor ID (if applicable), and other order information.
  • Order details: This section includes line items with specific product details—such as SKU/item number, quantity, price, and discount—as well as shipping method, delivery date, etc. 
  • Payment: Payment terms and conditions are included here, along with any information needed to complete payment, such as billing address, account number, credit card details, or ACH or wire info. 
  • Notes: This area is for any other specific information about the order needed to complete the transaction. 

Streamline your purchase order process with Order.co

The PO process becomes much more complicated as your order volume and supplier list grow. PO management software creates a streamlined, scalable solution that reduces manual tasks, consolidates your supplier list, and creates a consistent ordering process across your organization. With Order.co, your purchase requisitions, purchase orders, and other accounting functionality can be automated and codified, giving everyone more time to pursue higher-level goals. 

Using the platform, Order.co users can: 

  • Create and transmit purchase orders
  • Order through a curated catalog
  • Route requests and approvals 
  • Issue payments automatically
  • Manage contracts and suppliers

A scalable purchasing solution is closer than you think, and it starts with a demo of the Order.co platform.

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Schedule a demo to see how Order.co can simplifying buying for your business.

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