Purchase orders help keep your inventory steady and ensure you have supplies on hand.
When you opened your first small business location, sourcing supplies and fulfilling orders was likely easier. Maybe you used a combination of official purchase orders, one-off email requests and verbal contracts.
If you’re growing or want to streamline your purchasing process, purchase orders are essential. In this article, you’ll learn all about purchase orders and what they should include, whether you’re the buyer today or the supplier tomorrow.
What is a purchase order?
A purchase order (PO) or purchase order request is simply a document completed by a buyer and given to a seller to order supplies, inventory or other goods and services that the seller offers. It’s the official confirmation that an order was placed, and once the seller receives it, it’s also a legally binding contract.
That’s an important detail, because if issues arise with an order—like unexpected charges or missing items—you’ve got a legal document stating exactly what both parties agreed to.
Effective purchase orders include important details like contact information, purchase order date, item quantity and the price and payment terms.
If you’re the buyer, your supplier may provide a document for you to complete, or you might have to build one yourself. Creating a PO—whether to request or receive orders—is relatively simple if you use a template and even easier with online software.
If you’re the seller, once you receive a PO, you’ll prepare the products or initiate the services based on the requests and due date. You’ll also notify customers when you’ve shipped product (so they can track orders). Once the order is complete, you’ll request payment if you haven’t yet.
Real-world examples of using purchase orders
- As a buyer: You’re ordering new tables for your cafe. You call a supply company and a representative comes to the cafe to measure the area, present material and color options and confirm your order. While at the cafe or later on, the representative writes up a purchase order and shares it with you. (Online, you’d simply place the order or call it in.) Once you receive the tables, you’ll mark the PO as processed.
- As a seller: You’re fulfilling a purchase order request for company T-shirts. Your customer uses the purchase order template you supplied or creates the purchase order themselves. They include the color, size and number of shirts, along with other payment and contact details you need for their PO.
Whether you’re the buyer or the seller, save purchase orders for your records. In the event of an IRS audit, you’ll be glad to have your own copies of these transactions.
Purchase orders vs. invoices
The main difference between purchase orders and invoices is who’s sending the request.
- Buyer to seller: A purchase order is sent by a buyer to a seller when they’re ready to make an order request.
- Seller to buyer: An invoice is a request for payment for goods or services, sent by a seller to a buyer. A well-written invoice includes details like invoice date, terms of payment, item details and total amount due. Invoices are typically sent after the order is complete according to the agreed-upon terms.
As a business owner, you’ll depend on both of these documents to maintain inventory and positive cash flow. They also help facilitate smooth business relationships and simplify accounting on all sides.
Purchase orders vs. sales orders
Similarly, the distinction between purchase orders and sales orders is who initiates the process.
- Buyer to seller: A purchase order is prepared by the buyer and sent to the seller to order goods and services.
- Seller to buyer: A sales order is used to confirm a sale. It’s issued by the seller and sent to the buyer before delivering goods and services. It includes information from the original purchase order like PO number, total price and payment details. Once it’s received by the buyer, it serves as a legal contract and the seller must fulfill it.
How to create a purchase order
Both the way you request orders and how you let your buyers make purchase order requests have a big effect on how fast the process goes.
Here are some options.
- Electronic purchase orders: Accounting software like QuickBooks usually has purchase order templates you can use. This is a great choice because you can sync these records with your accounting tool. You can also use purchase order software created specifically to manage POs.
- Written purchase orders: If you choose to create POs using paper templates, we recommend scanning these documents so you have digital records, just in case.
What to include in a purchase order
If you’re a buyer completing a purchase order, you’ll need to include the following details. (If you’re the seller, you’ll provide some of this information and leave blank spaces so the buyer can fill in the rest.)
1. Purchase order (PO) number
Purchase order numbers are essential for keeping track of your files. Create PO numbers in a way that makes sense for you—with numbers only or a mix of numbers and letters. You can also auto-generate PO numbers using software.
2. Buyer’s information
Add your first and last name, phone number, billing address and shipping address, if applicable. You may pay upfront or once the order or services are complete, depending on the seller’s payment terms.
3. Seller’s information
Add the seller’s contact information, including business name, first and last name (if applicable), phone number and address.
4. Purchase order date
Include the date you confirmed or sent the purchase order.
5. Product or service details
List the products or services you’re requesting and the quantity and price per item—and use these figures to calculate the total amount due. Add any other details the seller needs to fulfill your order.
6. Payment terms
The seller may have explained terms of payment on the PO, their website or even over the phone. Examples include requiring credit card payment or net 30 billing. As the buyer, you might indicate when and how you’ll pay (in some scenarios). Make sure you’re clear on options when selecting sellers.
7. Delivery date
Similar to payment terms, the seller may indicate when the order will arrive or services will be completed, or you’ll list an expected shipping or delivery date.
Why you should optimize your purchase orders
Some small business owners avoid using purchase orders because they think “paperwork” slows things down. Or they’re happy with their vendors and don’t foresee problems.
This isn’t a good idea.
An organized PO system gives you a clear view of what’s been ordered, shipped and received at any time. Plus, there are other benefits to optimizing purchase orders.
- Buyer and seller both have clear expectations, creating fewer miscommunications.
- POs allow you to create more accurate budgets quickly.
- There’s lower risk of invoicing mistakes with detailed POs.
- POs are legally binding contracts, so you’re protected if there are errors.
- POs create an audit trail. They’re vital to tracking your business expenses and keeping your accounting records accurate. (This is another place where electronic POs are superior to paper.)
Your next steps
To successfully manage and grow a small business, make detailed purchase orders part of your supply and inventory process.
Start by standardizing your purchase order template. Then look into POS systems that include purchase order management to streamline your operations and save time.