What is a purchase order? A guide for small businesses

A purchase order is a document that shows a business’s intention to buy goods from a supplier.

The British Business Bank describes it as an invoice in reverse, because it lists the items a business is agreeing to buy, alongside prices and quantities.

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And because a purchase order clearly lists items, quantities and prices, there’s also less risk of suppliers getting orders wrong.

What is a purchase order?

The purpose of a purchase order is to help businesses keep track of what they’ve bought, because the purchase order number is also listed on invoices and delivery notes. This makes them an important part of record keeping.

Purchase orders are beneficial for all parties. The buyer has a document that clearly states which items they bought, minimising the risk of supplier errors. And because the purchase order number will correspond with invoices and delivery notes, suppliers should receive prompt and accurate payments.

Purchase orders help the buyer to keep track of cash flow, as they know what’s going to be paid out and when. Purchase orders are also vital when monitoring stock levels, because they track the quantity of items and when they’ll be delivered.

The purchase order can be a legally binding document alongside a contract, so if it comes to a dispute, each party will be able to prove that there was an agreement in place for items at particular prices and quantities.

Types of purchase order

• single-use purchase order – this is an agreement for one order, which remains in place until all the items have been received by the buyer
• planned purchase order – similar to the above, but this is usually a longer-term agreement that doesn’t include the delivery date, so it allows the buyer to anticipate future requirements
• blanket purchase order – larger businesses may use blanket purchase orders to track all items ordered for particular departments or projects

You might also choose to draw up a contract, which makes purchase orders legally binding. This could be useful for long-term agreements.

How to raise a purchase order

Raising a purchase order can be as simple as putting all the relevant details into a purchase order template, then sending it to your supplier by email or letter (we have more on how to create a purchase order below).

If you have an employee who deals with accounts, raising a purchase order will usually be their job.

That being said, many accounting software packages can raise a purchase order quickly, which should simplify the process for you if you don’t have a dedicated finance team. The software usually lets you track deliveries and invoices alongside purchase orders, so you have your records in one place.

Here’s what raising a purchase order looks like step-by-step:

• the buyer creates a purchase order and sends this to the supplier
• the supplier agrees to the purchase order
• the supplier sends the necessary goods or services
• the supplier issues an invoice
• the buyer pays within the agreed timeframe

How to create a purchase order: step-by-step

What does a purchase order look like? Here’s what it needs to include:

1. Purchase order (PO) number – this is the important part, because it allows all parties to cross check purchase orders with deliveries and invoices
2. Buyer details – including business name and relevant contact details
3. Shipping details – the address of where the goods and services need to go, as well as the shipping method, date, and how long delivery is likely to take
4. Supplier details – as above, but with the appropriate contact details of someone in the supplier’s business who’ll be dealing with the order
5. Relevant terms – including payment terms and any other terms, for example shipping agreements
6. List of items – including any catalogue numbers, the quantity, prices, and the net total
7. Description of goods and services – to add extra context to the list of items

You can create a purchase order template in Microsoft Word or Excel, or use aforementioned accounting or invoicing software to raise purchase orders quickly and easily.

Do you use purchase orders in your small business? Let us know in the comments below.