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What is a Purchase Order and How does it Work?

What is a Purchase Order and How does it Work?

Purchase orders, known as POs, are business documents that detail a buyer’s request for products or services from a supplier. When a buyer issues a PO to a supplier, they are asking for a specific product or service, including the quantity and agreed-upon price, without having to pay for the item in question at the time of issue.

As a business owner, you will need to familiarise yourself with purchase orders to send them out to your company’s suppliers. POs are a great way to take control of spending while streamlining the process of acquiring goods.

Learn more about small business purchase orders and how to make one below.

How do Purchase Orders Work?

So, how does a purchase order work, exactly? Purchase orders are legally binding contracts issued by your business to another business or supplier to purchase and sell goods or services. The document outlines a commitment made by one party to the other to buy the products described within the PO at a later date.

Purchase orders are used by businesses to place an order without having to pay for the products at the time the PO is issued. The seller allows the buyer to purchase on credit, without the risk of losing money, as the document outlines payment terms that the buyer is obligated to pay.

Check out these tips for finding the best purchase order software for your self-employed and small business needs.

Purchase Order vs. Invoice

So what is the difference between a purchase order and an invoice?

The buyer issues a purchase order for products they want to acquire from another party, such as a supplier. An invoice, on the other hand, is issued by the business or seller that is selling the product to another party, such as a customer.

When Should You Use a Purchase Order?

Purchase orders are most commonly used by businesses whenever they must purchase supplies or inventory on an account to fulfill their customers’ demands. These documents are a key part of the purchasing process.

Suppose you need to restock your inventory with specific products you want to sell in your store. You would issue a purchase order to the supplier that sells you those items at an agreed-upon price point and delivery method.

Once the supplier has delivered the items to you, and the order process has been fulfilled, you would need to pay them for these goods. The seller will issue you a sales invoice, using the corresponding PO number for easy referencing. From that invoice, you can pay off the order and complete the transaction.

Using a blanket order

A blanket order, or blanket purchase agreement is a purchase order that covers an ongoing contract between the buyer and seller. This agreement allows for multiple purchase deliveries over a period of time. The blanket order will run for as long as credit is extended to the buyer from the seller.

Therefore, your company should consider using blanket orders when there is a recurring need for goods or services that the seller in question is providing to you.

Can you cancel a purchase order?

An order purchase can be cancelled as long as the order has not yet been shipped and fulfilled. If the order has already been fulfilled, then the PO cannot be cancelled. So, is a purchase order a contract? Specifically, it is a binding contract between the two parties and must be honoured; otherwise, legal action can be taken against you.

What’s Included in a Purchase Order

Purchase orders should be made with clear and concise information -- the more details you provide to the supplier, the better. To ensure your purchase order covers everything you need to order, remember to always include:

  • Purchase order number
  • Product or service being purchased
  • Supplier name, contact information, and billing address
  • Buyer’s name, contact information, and shipping address
  • The quantity of the order, including the unit of measurement
  • Price per unit
  • Line total
  • Sales taxes
  • Total price
  • The delivery date
  • Shipping method
  • Shipping terms and conditions
  • Terms of payment

Purchase Order Example

Here is an example of a purchase order for a construction company. This document outlines all of the terms and conditions covering purchases and other services. An actual purchase order sheet will look something like this:

Purchase Order Example

Why Use Purchase Orders?

While a purchase order may seem like another tedious document, it’s quite beneficial for the overall maintenance of your business. We’ve listed a few ways they can help your growing business, just in case you’re not convinced on why you should use purchase orders.

  • Make orders easier to track: Purchase orders are an important part of record keeping. By creating a purchase order, you’ll be able to track your orders much quicker. Plus, when your order arrives, you can easily check whether you’ve received the correct items and quantity.
  • Ensure clear communication: Since purchase orders are highly detailed, they ensure you and the supplier are in agreement about what’s expected.
  • Make life easier for your suppliers: A purchase order helps suppliers generate your order and successfully deliver it to your business.
  • Provide legal protection: Purchase orders provide contractual and legal protection for the buyer and the supplier. Without a purchase agreement, you may be left with duplicate orders you didn’t want but have to pay for anyway. It also prevents the seller from making unexpected price increases on your order. Moreover, purchase orders can leave a paper trail, so you can look back at transactions if there’s an audit.

There are numerous benefits of purchase orders that can help your SME flourish. To make it even easier, you can also automate purchase orders.

How to Send Purchase Orders

Once you’ve created a purchase order for a customer/buyer, you will need to decide how you want to send them this document. Although companies used to mail or deliver purchase orders in person, many of them now opt to use email to send their purchase orders. It is best to add the PO as a PDF document and attach it to the email as it makes it easier to print out and keep on record for both parties.

Electronic invoicing and purchase orders offer perks for both the buyer and supplier. It allows for a quicker turnaround of a transaction. If a mistake is found in the document, it can quickly be fixed and a new order issued without delay.

Online Software That Can Help Your Small Business

The purchase order process for small businesses can be made easy from start to finish with the help of QuickBooks Online. QuickBooks Online’s invoicing software allows you to send an invoice, including purchase orders that are customisable for any of your suppliers.

How to Manage Purchase Orders in QuickBooks Online

Learn how to enter, track and record purchase orders in QuickBooks Online by watching the video below. 

If you have found this video useful, follow our YouTube video tutorials playlist, where you will find this and many other tutorials that will make you a master of QuickBooks Online.