What is a Purchase Order? Format, Examples and Templates

E-commerce and retail sales are booming all over the world. If you own an e-commerce store, simply knowing the differences between terms such as an invoice, purchase order, and packing slip helps boost your operations.

The whole e-commerce and retail process starts with the purchasing of goods for sales. Without this step, there is no good to sell.

You need to have a comprehensive understanding of the purchasing process. Knowing what a purchase order is and how it works is essential for your business.

You also learn the differences between purchase orders and invoices, how to track purchase orders, and automate the purchase order process.

What is a Purchase Order?

A purchase order is a document that you (buyer) send to a supplier (seller) indicating a request for an order of goods and services. In other words, it is a legal document that a buyer sends to a supplier to confirm a purchase.

The document contains every detail about the type and quantity of items ordered. It shows the agreed prices of goods and the payment terms and conditions. Buyers use purchase orders to ensure that the exact products ordered are delivered.

Purchase orders are beneficial to both the buyer and the supplier. The introduction of purchase orders has made the purchasing process easy and accountable. Also, it allows for payment tracking and record keeping. With purchase orders, businesses can specify the type of goods they want and when they want them.

Buyers use an electronic system to submit purchase orders for effective tracking. There are also purchase order templates that can save you the time of creating one from scratch.

A purchase order provides the necessary details that help both the buyer and supplier to keep an accurate record. It is one of those small business bookkeeping basics every business owner needs to know.

Every purchase order includes the following:

• A purchase order number
• Billing address
• Shipping date
• The goods, required quantities, and price
• Terms and conditions.

Generally, the more information you provide, the more effective your purchase order is. However, specific orders will include more specific details.

Legal Status of a Purchase Order

Purchase orders are legal contracts between buyers and suppliers. Before a purchase order leaves the purchasing department of a company and goes to the suppliers, it must be approved by the company. Buyers should carefully communicate their requests to suppliers to avoid any form of confusion on any side.

A common misperception is that a purchase order document is only used for record-keeping. However, it can be used to settle any dispute between the buyer and the seller. If the buyer refuses to make payments due to misinterpretation of information, the legal contract status of the document protects/defends the seller.

For a buyer to be protected in cases like this, it would be best to have purchase order confirmation. This means that the seller agreed on the terms in the document and a contract is sealed.

How Does a Purchase Order Work?

A purchase order is simply a document sent from a buyer to a seller for purchase. But there are processes to follow in creating a purchase order from when the buyer orders the goods to when the suppliers deliver the goods.

• Identify a Pressing Need. Before a buyer places an order on goods, he or she must be able to identify a pressing need that the supplier’s goods or services can satisfy. While identifying this need, the buyer should tell what product will be needed, the quantity that will be sufficient, and how often subsequent purchases will be made. For instance, if your company needs carton-like boxes to deliver goods to customers, you will need to calculate how many boxes you need, when you need them, and how frequently you will place subsequent orders. If you want to make orders for a long period due to an upcoming holiday, you can look at the previous year’s total order and do an estimate of the amount that will be enough.

• Prepare a Purchase Order. With the necessary information, the buyer should prepare a purchase order and send it to the supplier for confirmation. When sending the purchase order, indicate when you need the approval to keep the process moving and fast. The confirmation response should come at the right time to meet the buyer’s schedule or should give the buyer a comfortable time to look for other suppliers if needed.
• Draft a Comprehensive Purchase Order (PO) Terms and Conditions. Ensure that you draft comprehensive purchase order terms and conditions that cover every possible outcome. Let it cover details about the possibility of canceling an order just to set clear boundaries and maintain a good relationship between both parties. Picking up from the previous instance, after getting a supplier that can provide the boxes, draft your purchase order outlining the number of boxes you need, and when exactly you need them.
• Confirmation of Purchase Order. Once the purchase order gets to the seller, it is up to them to go through the request and confirm if they can fulfill the order in terms of required quantities and time of delivery. From the example of cartoon-like box shipment, your vendor will review your order and check their shipping capacity if they are capable of fulfilling your request. They will also go through the terms and conditions attached to the document.
• Approval of Purchase Order. If the vendor can fulfill the order requests as stated by the buyer, they will approve the purchase order thereby making it a legal contract between both parties. From the above example, if your supplier can execute your requests, they will send an approved copy of the purchase order document to you for confirmation. It means that the seller and the buyer have both agreed to the terms and conditions in the document regarding the prices of goods, quantity, time of delivery, etc.
• Provision of the Product or Service. When the purchase order has been approved, it is the responsibility of the supplier to provide the product or offer the service as agreed upon in the purchase order. During this time, the supplier can generate an invoice regarding the amount in the purchase order and send it to the buyer. The invoice should outline the goods bought, the quantities delivered, and the amount owed. For example, after the approval of the purchase order, you should receive your order (cartoon-like boxes) alongside an invoice showing how much you owe. Your vendor would have payment terms i.e. a deadline for payment of goods ordered. Deadline could be set for 15-30 days after the issuance of the invoice. The vendor expects you to make payments within the deadline after they issue the invoice.
• Invoice Payment. The final stage is where you (the buyer) are responsible for paying the invoice regarding the payment terms as indicated by the seller. It is up to you to make the necessary payments according to the agreed payment terms in the purchase order.

Format of a Purchase Order

For a purchase order to effectively communicate requests to suppliers, it needs to contain the right information arranged appropriately.

Are you ready to draft your company’s purchase order? Here is the format you need.

• Header – The first information on the purchase order document should be the header. This is where you provide your company details, i.e. company’s name, company’s address, purchase order date, and purchase order number.
• Supplier’s Info – After the header, you provide the details of the recipient of the purchase order. You need to provide the name of the supplier’s company, your contact name, and the address of the supplier’s company. Ensure the information you give is valid.
• Shipment Details – In the purchase order document, you need to indicate where the order will be sent to, the shipping method to use, the shipping terms involved, and the intended date of delivery.
• Order Details – The next information in the document is the order details. It is where you give a comprehensive description of the goods you order. For each of the products you order, provide a column indicating the SKU number, item name/description, quantity of units, price per unit, delivery date of each product, and total price.
• Conclusion – Complete the purchase order document by doing a sum-up of the total price of products. State if there are any discounts, coupons, taxes, and shipping costs. Indicate the total after deducting the necessary extra charges.

Types of Purchase Orders

All purchase orders are not created the same way. If you have seen or created a purchase order before, there are still other types you need to know. There are four types of purchase orders and what differentiates them is the purpose they are used for and the information they contain.

If you have seen purchase orders and cannot tell the difference, you should be able to identify the different types after this section.

Here are the four types: contract purchase orders, blanket purchase orders, planned purchase orders, and standard purchase orders.

1. Contract Purchase Orders

Contract purchase orders are the most formal type of purchase order. For this type of order, the buyer and seller will have to sign a contract stating the purchase terms and conditions before a purchase order regarding the contract is issued.

This type of purchase order presents the safest legal protection for both parties involved. Often, the list of items is omitted in the contract. The purpose of contract purchase orders is to establish an agreement between both parties.

For example, a logistics company running out of custom delivery boxes for packages will have to sign a contract with a supplier regarding the items, quantity, pricing, delivery date, and terms of the goods (delivery boxes) and follow it up with a purchase order document. The contract only contains the negotiated terms and conditions while the main order contains all other details.

In this case, the two companies will be under a legal contract agreement. Contract purchase orders are used for establishing a long-term relationship between a buyer and seller.

2. Blanket Purchase Orders

Blanket purchase orders are often standing orders. In the case of blanket purchase orders, buyers place multiple orders at a time due to some reasons. Buyers can place multiple orders to negotiate discounted pricing in the purchase order document.

Most times, when a blanket purchase order is made, there is a time frame for the validity of the order. Also, there is a maximum amount of goods that will be ordered during that period. A blanket purchase order usually contains the purchase order terms and conditions, a list of items to be purchased, discounts, and pricing details. It does not include delivery dates and delivery locations for the whole purchase order.

For example, if a logistics company can get discounted deals when they make multiple orders of custom delivery boxes from a single vendor, then they would craft a blanket purchase order document to place an order on the boxes.

3. Planned Purchase Orders

Planned purchase orders are placed when buyers are estimating and planning for the future needs of the company. In this case, the buyer is submitting a purchase order in advance.

The planned purchase order document indicates the items, quantities, pricing, and payment details. But the quantities would be guesswork based on speculations and the delivery date will probably be uncertain.

For example, if a logistics company decides to place a planned purchase order, it means they would estimate how many delivery boxes will be sufficient to deliver customers’ packages for a while with a very convenient delivery schedule.

In essence, a planned purchase order does not include confirmed delivery dates and locations but will include every other detail about the order. Any dates and locations in a planned purchase order document are said to be tentative.

4. Standard Purchase Orders

A standard purchase order is the most commonly used type of purchase order. Also, it is the easiest type of purchase order to understand because they are the most detailed.

For standard purchase orders, the buyer is very clear with the information they provide regarding the order. Standard purchase orders contain a list of items, the quantity of each item needed, the price of each item, delivery dates, delivery locations, and payment terms and conditions.

This type of purchase order can be adjusted to suit different functions depending on the buyers’ needs.

Picking up from the logistics company’s example, they may decide to place a standard purchase order because they know exactly how many custom delivery boxes they need and when they want it to be delivered. The purchase order will include the number of boxes needed, pricing per box, total pricing, delivery schedules, and payment terms.

Difference Between Purchase Orders and Invoices

Purchase orders are sent from buyers to sellers stating the request to purchase items. The order includes every detail concerning the purchase of items from the pricing, quantities needed to the payment terms, and delivery schedules.

Invoices are documents prepared by sellers after the buyer has submitted a purchase order. An invoice is a non-negotiable document. For a seller to prepare an invoice, it means they have agreed to the terms in the purchase order document and are ready to provide the goods or services as stated in the order. At this stage, the seller is not willing to further negotiate the terms or change any agreement.

The primary differences between a purchase order and an invoice are the purpose it serves and the details entailed in it. Buyers create purchase orders while suppliers create invoices.

For buyers, purchase orders serve as a comprehensive and organized document to express a request for the need for goods and services from suppliers.

In the document, the purchase order terms and conditions would be stated so it is up to the supplier if they agree to the terms. If the supplier agrees, then a legal contract has been sealed. Purchase orders make the process of buying and selling easy and smooth. It can be used for record-keeping and payment tracking.

A well-organized purchase order document makes it easy for a company to prepare financial statements. With it, you can track and receive the exact goods you ordered at the agreed time.

Purchase orders build a strong and long-term relationship between two companies. It can be used to settle little misunderstandings that can arise later in the future. Purchase orders contain more details than invoices.

For vendors, invoices are used to politely ask buyers for the money they owe for the products delivered to them. In other words, invoices are reminders that buyers have not paid for the goods they ordered. The use of invoices sometimes gives buyers the chance of extensions on payments. Invoices are only used in business-to-business transactions, not involving a company and an individual consumer.

B2B transactions are more reliable than business-to-customer sales. In B2B sales, the sellers are assured that the buyers will make payments when they can.

How to Track Purchase Orders

Tracking purchase orders is essential throughout the whole purchasing process. Do it to ensure that you receive the exact products you ordered and that you pay only once for the products.

The tracking of purchase orders becomes even more important when your business is growing and you are reaching the stage where purchase orders are becoming complicated to keep. If your business has reached this stage, it is best to implement purchase order tracking as soon as possible.

Purchase orders are simply to ease the process of record-keeping but they can also get complicated at some point. Some decades ago, purchase orders were paper-based. For every transaction between two companies, two copies were created. One copy will be sent to the other supplier while the other copy will remain in custody for record purposes.

With every new transaction, purchase orders keep floating around and businesses will get stuffed with copies at some point in the operation. Luckily, there are new and better ways to do purchase order tracking without having to send papers all around. Let us take a look.

How to Electronically Track Purchase Order

There are a few methods to track purchase orders without much work and a stuffy physical environment.

1. Using Microsoft Excel

One of the most common ways of tracking purchase orders is the use of Microsoft Excel. You can create your tracking documents from scratch or download free Excel purchase order tracking templates to make it easier. Using Excel for your purchase order tracking, you are sure not to lose your documents or face calculation errors.

Purchase orders generated with Excel are often sent via emails, which can always be retrieved. They are also stored digitally which is quite better than stocking up cabinets with paper-based orders.

One of the downsides of using Excel is that your purchase order can be sent to the wrong email. It could be accidentally sent to someone outside the company. Also, they are easy to tamper with because there is no way of verifying if tampering occurred.

Excel-generated purchase orders are also printed out for approval signatures from the appropriate person. Alternatively, you can use PDF editors and form fillers to add signatures from appropriate signatories.

Small-scale businesses or sole traders can use Excel for their purchase order tracking but the more the purchase order processing, the more likely problems begin to occur.

2. Using Procurement Systems

Procurement systems are applications that generate purchase orders, track them, and integrate them with other systems. They handle almost all procurement administration duties.

Most businesses believe that using procurement systems is the best way to track purchase orders. One benefit of procurement systems is that they handle a large part of the whole tracking process.

Cloud-based procurement systems can be used for real-time tracking from any location, on any device. At any point in time, workers in a company can check purchase orders and get the information they need in little time. Purchase orders are also automatically linked with the appropriate invoices so that buyers do not make the wrong payments on purchase orders.

3. Using Inventory Management Systems

There is not much difference between procurement systems and inventory management systems. The inventory management system is like a part of procurement systems. Procurement systems processes include inventory management systems.

Businesses that do not need the full service of procurement systems can use inventory management systems. In this case, you can use inventory management software to track your inventory and purchase orders.

Cloud-based inventory management systems can feature automation, full security, and real-time purchase order tracking like procurement systems.

To get the best tracking services for your company, pick the right method that matches your needs as a business. For excel-generated purchase orders, there are numerous templates to download online. For the inventory management system-generated purchase orders, you can get free templates when you use inventory management software.

Importance of Purchase Orders For Your Business

Despite its obvious benefits for businesses, many organizations still do not feel the need to use purchase orders, either the paper-based method or electronic method. They feel they have built a strong relationship with suppliers over long years of operations and there is no need to formally organize purchasing processes.

Owners of small-scale businesses usually have straightforward purchasing processes during the start-up phase. As the company grows, and more hands get involved in the purchase process, it begins to get complicated. The purchase process also changes when the relationships with vendors evolve.

At some point in the company’s growth years, demands increase, and the purchasing process gets more complex, specific, bulky, and urgent. At this stage, there is room for many errors if purchase orders are not used or managed properly.

In times like these, if a buyer receives an order without a purchase order number or the necessary details for reference, it would be difficult to figure out an error later in the future. Situations like these build complexities between the buyer and seller.

Purchase orders serve as documents offering legal protection and clear details about every single purchase process. The use of purchase orders simplifies order tracking, record keeping, and preparation of financial statements such as balance sheets and income statements. It gives both parties a chance to reference a transaction that happened some years back.

Also, when things go wrong at some point, they can review the document to know where the problem came from.

Why Automate the Purchase Order Process

Businesses that use the paper-based purchase order tracking system have greater chances of dealing with too many documents. For a purchasing cycle, you might have to process about six to seven different documents e.g. purchase orders, invoices, requisitions, packing slips, order approval documents, quotes, etc.

Imagine you have to keep all these documents for a cycle and your company carries out an average of two purchasing cycles per month, bulky right?

You have to keep track of all these documents for every cycle to make your accounting easy and relying on papers can be dangerous.

Here are some of the reasons why you should switch from a paper-based system and automate your purchase order process.

• Less Liable to Damage – A paper-based system is very risky to manage because the papers can get misplaced, damaged, or burnt. Purchasing processes require reliable record-keeping management. If those papers get lost or damaged, it would be more difficult to duplicate documents like invoices, requests, and purchase orders. Your company will have to spend time, energy, and money to recover lost documents. When you automate the purchase order process, it is less liable to damage.
• Less Time and Energy Expended – Paper-based systems need a proper filing system that should be organized, monitored, and regularly updated. The filing system will take a significant amount of space (that keeps on increasing on more purchasing cycles) in an office. As time goes on, space grows and it will take lots of time and energy from the employee to maintain the space smoothly. Also, referring to a document in the system after some years can be tedious for the company because it can take hours to find the right document in question. Automating your purchasing processes with a purchase order software program digitalizes the whole procurement operation by using electronic means to process the necessary documents. These documents are tracked in a single system thereby narrowing down the time spent searching for a document. An audit trail is done to keep you updated on whatever action is taken on the documents. You can upload purchase orders, invoices, and requests to suppliers to keep track of the necessary information.
• Easy Conversion of Purchase Orders to Invoice – Automation of purchase order processes makes it easier for a company to convert orders into invoices which would hasten the payment process. Also, the risk of losing information due to damage can be avoided with the electronic procurement process.

Purchase Requisitions and Purchase Orders

As a business owner, if your company is not using purchase orders, there is a high chance that you do not know the process your employees follow when buying something.

Using an electronic purchasing system gives you the power to create a purchasing process that guides who buys anything, and how much they can spend without approval. Purchase orders that involve a lot of money should be under effective purchase order control. It is to ensure that the right hands append signatures before a contract is sealed.

In essence, considerable visibility into your company’s spending habits will give you the chance to make data-driven and rational decisions for the progress of the company.

Using purchase requisitions, your employees can make a formal request for the things they need to keep the work running. Some organizations already do this by informing the employees to submit their requests to the manager while the manager carries out the purchasing process. But a better way of doing this is to create a purchase order request form and asking all the employees to fill it.

The request form has all the necessary information needed to approve the requisition. It can also be attached to the purchase order form when the requisition is confirmed. Once your employees start using the purchase requisition format, you will find it easy to track whatever is bought and map out annual budgets based on average monthly spending.

Also, you can find out how the supplies are used and create savings plans. The board that has control over the purchasing process will maintain the budget and disapprove any requisitions that go over the budget.

Purchase order control units can also use requisitions to spot purchasing patterns. It will help them to make purchases in bulk and request volume discounts (if possible). Creating requests digitally reduces processing time because the most requested items can be starred and added to a catalog from the supplier offering the best prices.

When requisitions become a norm in your company, you can start drafting purchase orders from those requisitions. Subsequently, you will inform your suppliers that you will be sending a formal purchase order document before making payments. Your suppliers will most likely welcome your idea because it will be of advantage to both parties.

When the control unit has pending requests, the buyer in charge will prepare a purchase order form and submit it to the supplier. The supplier will communicate any issues they find in the document (if there are any). If there are no issues, they will deliver the order and invoice once the buyer makes payments.

Converting a requisition form to a purchase order form is easy if you are using an electronic procurement system. When the requisition number is attached to the purchase order number, you can easily track the purchasing process from the request to the delivery. The requisition will be automatically converted to a purchase order once the control unit approves it.

Standardizing the combination of requisitions and purchase orders can take some time. But doing so helps your purchase order tracking processes. Monitoring the company’s spending habits is one good way to facilitate the company’s growth and it can be done by tracking purchase orders from the minimal level.

Purchase Orders FAQ

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