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.
And because a purchase order clearly lists items, quantities and prices, there’s also less risk of suppliers getting orders wrong.
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.
You might also choose to draw up a contract, which makes purchase orders legally binding. This could be useful for long-term agreements.
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:
What does a purchase order look like? Here’s what it needs to include:
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.
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