What is a purchase order?

A purchase order (PO) is a document created by a buyer. It itemises the goods or services they are purchasing and sets out key details of the transaction. Using a PO helps to ensure that both buyer and seller are clear on what is expected of them. It therefore helps to streamline the purchasing process.

How does a PO work?

Here is a typical purchase order example that illustrates how the PO process works:

Requirement specification: The buyer identifies and specifies their requirements for goods or services.

Search for suppliers: The buyer searches for suitable suppliers who can meet their requirements.

Negotiations: The buyer and supplier negotiate the terms and conditions of the transaction. These will typically include price, payment terms and delivery date.

Creation of a PO: Once the buyer and supplier agree on the terms and conditions, the buyer creates a PO, which is then sent to the supplier.

Supplier acknowledgement: The supplier reviews the PO and confirms its accuracy and agreement to the terms and conditions outlined in it.

Delivery of goods or services: The supplier delivers the goods or services per the agreement. The supplier provides the buyer with an invoice that includes the PO number.

Payment: The buyer then inspects the goods to ensure they meet the requirements outlined in the PO. Assuming all is well, the buyer pays the supplier according to the payment terms outlined in the PO.

PO vs invoice

There are three main differences between purchase orders and invoices.

POs are created by purchasers and sent to sellers. Invoices are created by sellers and sent to purchasers.

POs set out the details of the goods or services the purchaser wishes to buy and their preferred transaction terms. Invoices request payment and provide the necessary details for the buyer to check that the request is valid.

POs are sent at the start of the purchase process. Invoices are sent after the purchase process has started. Most invoices are sent after at least some of the goods or services have been delivered. Sometimes, sellers send a deposit invoice. As the name suggests, deposit invoices request partial payment in advance of delivery.

When is a PO required?

A PO is typically required when a buyer wants to purchase goods or services from a supplier and wants to formalise the terms of the transaction. A PO is often used when a buyer is purchasing from a supplier for the first time. Using a PO can help to give the buyer confidence that the terms of the transaction are clearly defined.

A PO can also be useful in situations where the buyer needs to purchase large quantities of goods or services. In this situation, the business may choose to use a blanket PO. 

This is a contract between a buyer and a seller that outlines the terms for multiple deliveries of goods or services over a specified period of time, at a predetermined price. 

This type of PO is frequently utilised by companies that have a long-standing business relationship. If a blanket PO is particularly valuable, the seller may offer the buyer a discount.

Benefits of POs

There are several benefits to using POs for buyers and sellers. Here are the five main ones.

Formal agreement

A PO serves as a written document outlining the terms of the transaction between the buyer and supplier. It records key information such as the types and quantities of goods or services, price and delivery terms.

Financial control

With a PO, the buyer can keep track of their expenditures and hence their budget. This helps to ensure that they only purchase the necessary goods or services and pay the agreed-upon price.

Streamlined procurement

A PO standardises the procurement process. This facilitates efficient tracking and recording of all the necessary information.

Quality and accuracy

A PO reduces the risk of error or miscommunication. It therefore helps to ensure that the buyer receives the correct goods or services, in the correct quantities and at the agreed-upon price.

Payment enforcement

The legally-binding agreement established by a PO enables the buyers to enforce payment terms. It also ensures that the supplier is paid on time. This reduces the risk of payment disputes.

How can GoCardless help?

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.