How to create a professional purchase order template

There’s a growing “efficiency gap” in the procurement process for many businesses in the UK. The cost of goods is rising, but the amount available to spend is stagnating or going backwards - with 56% of businesses citing a reduced operational budget as their primary internal pressure.

As your business grows, you’ll notice that managing your spending informally isn’t sustainable. You need to know where and when your money is going, and you need the increasingly admin-heavy process around it to be as cost- and time-efficient as possible.

That’s where a digital purchase order system that controls, tracks and automates your procurement workflow comes in incredibly handy. This guide will tell you how and why they work, where you can make your own template, and all the steps you need to move your procurement process from manual to automated.

What is a purchase order template - and why do you need one?

A purchase order (PO) template is a standardised document - in most instances, a fairly typical order form - used by a business to communicate a buying request to a seller. However, it also functions as a “contract in waiting” that, once accepted by the seller, becomes a legally binding contract between both parties.

Having a purchase order system in place is important because:

• It removes the risk of verbal and email agreements (duplicate payments, lack of definitive records, legal protection and visibility).

• It offers legal clarity on what’s being bought, how much is being paid and the terms of delivery.

• It provides an audit-ready paper trail.

• It helps boost supplier trust and preference - and can be required for purchase with larger vendors in some cases.

How a purchase order system protects your business

Having your procurement workflow recorded and tracked comes with several benefits:

• It allocates funds ahead of time, giving you full visibility on your real-time budget and what you do and don’t have to spend.

• It helps resolve disputes quickly. For example, if a vendor has sent a lower quantity of goods than agreed or charged too much per unit, you don’t have to scramble through your emails in the hope of finding proof that’s the case. And because POs are legally binding, they enforce the appropriate resolution, too.

• Because it’s fully tracked and referenced, it prevents issues like duplicate payments and “Maverick Spending” (unauthorised purchases made outside of agreed procurement policies and supplier agreements).

• If you want to access purchase order financing (more on this later), a formal PO document is required.

Understanding the difference between purchase order and invoicing

One thing that often gets confused in the buyer-vendor relationship is the purchase order and invoice distinction:

• Purchase order: this is a request to buy goods, made by the buyer.

• Invoice: this is a request for payment for said goods, made by the seller (vendor).

So, at no point in the process will you create an invoice as the buyer. Invoice generation is the vendor’s responsibility alone.

How purchase orders help you manage your budget (allocation)

As mentioned above, allocation - the process of earmarking funds for purchase ahead of time - is critical for scaling while keeping your margins under control. Through PO software, you can get real-time visibility of your budget, what’s been put aside to go out and when, and what money you actually have available to spend elsewhere.

How to implement your purchase order system

The good news is if you’re buying things via a fully manual process at the moment, a transition to a basic digital template is pretty simple.

Some useful resources

A quick Google search of ‘free’ or ‘best’ purchase order templates will throw plenty of usable options your way, but here a few decent places to start:

• Microsoft Word and Excel both provide preformatted templates.

• Google Sheets has a Template Gallery.

• HubSpot has a PO generator that allows you to download into Excel or a PDF.

• Xero offers customisable options for all sorts of POs.

Creating your first purchase order - the essentials

To create a purchase order, you’ll need to identify a business need and an approved vendor to buy it from. Once you have all the details, you enter them on the form and send it off to the vendor for review and, assuming everything’s in order, acceptance.

Your purchase order process should include an internal approval step, where the PO is reviewed by a manager or the finance team to ensure the spend is allocated correctly as per your budget.

A professional PO should contain several key data points to meet legal and operational standards. They are:

• PO number: a unique reference code for tracking.

• Company details: your business name, address, VAT number (if applicable) and EORI number (if you’re importing goods from abroad, including the EU).

• Vendor details: your supplier’s name and contact details.

• Itemised list: every item you’re buying, each item’s Stock Keeping Unit (SKU) number (SKUs are unique numerical bar codes assigned to products to help you manage your inventory), unit quantities and unit prices.

• Delivery date and address.

• Payment terms: that define when payment is due.

Understanding the full procurement lifecycle

Procurement workflows extend well beyond generating a purchase order and sending it off. If you want maximum efficiency from your buying process, you need to understand the full lifecycle and your duties within it:

• Requisition: the starting point. You or someone from within your organisation requests an item.

• PO creation and approval: the steps we’ve just gone through above. The business creates a PO form with the required details. This is then checked against the budget by an internal decision maker and approved for sendout.

• Vendor acceptance: the vendor receives the PO and agrees to the terms.

• Goods received: you confirm the items have arrived and check they’re in the right condition and quantity against the packing slip provided.

• Invoice delivered: the vendor sends the invoice to you.

• Three-way matching: this is the verification process before finalising payment. You check the PO (what you asked for), the packing slip (what you received) and the invoice (what the vendor’s charging) and ensure they match.

• Payment: if the three-way match lines up, you make payment as per the terms of the agreement laid out in the initial PO - usually within 30 (Net 30) or 60 (Net 60) days.

Scaling from manual templates to a digital purchase order system

While a custom spreadsheet or word doc template is a good - and important - move away from verbal/email agreements, it’s still a manual process that isn’t kitted out for scale.

So if you’re moving up in the world, you’ll need to look at a fully digital purchase order setup for the sake of managing costs and higher volumes.

The cost of doing things manually

According to the Indirect Procurement Report from RS and the Chartered Institute of Procurement & Supply (CIPS), the average business cost of processing an order is £77. Complexity of product and process can make things more expensive, with more than a quarter of business reporting per order administrative costs of over £100.

These numbers reflect a blended average of manual, semi-automated and fully automated processes. So, if you’re operating a manual workflow, your cost per process may exceed those topline numbers, while fully automated organisations can lower their per order spend to well below the £77 average.

There’s also an increasing spotlight on the 30-day window for procurement disputes. This is a rule that’s been in place since 1998, but tightening payment reporting practices in the UK mean the ability to identify and flag issues within 30 days of receipt is more important than ever.

Then, you have the issue of visibility between manual order templates and your business finances. If your procurement isn’t wired into your bank account, you can’t see your spending at a glance, and you increase the risk of unauthorised, untracked expenditure - which can torpedo your end-of-month numbers.

Considerations like these are why businesses typically find the limit of effective manual PO processing quickly.

The benefits of installing a PO tracker

Whether it’s a relatively simple centralised spreadsheet or, even better, a dedicated dashboard, a PO tracker acts as your one-stop shop for all your key procurement data. Having one in place offers you:

• Centralised oversight: with every order (and all the details of each one) logged in one place.

• Automated allocation: tracking software will automatically deduct PO totals from your remaining budget, giving you a proper overview of what you’ve spent and, perhaps more importantly, what you have left to spend.

• Audit readiness: HMRC compliance is significantly more simple with a sequential, dated log of every purchase you’ve made in place.

Essential features to look out for in PO software

If you’re plugging in a PO tracker for the first time, there are four (or five, if you’re operating internationally) big things to make sure are included with your new software:

• Mobile approvals: meaning you or any other decision maker can approve spending on the go and avoid any unnecessary delays in purchasing.

• Automated three-way matching: which gives you automatic reconciliation of your invoice, PO and delivery note - and flags any discrepancies immediately.

• Real-time budget tracking: tying in to what we mentioned above around automated allocation and having full, up to date visibility of where your money is going.

• Easy integration: so your PO software has the ability to talk to whatever accounting setup you’re using.

• VAT and multi-currency support: if you’re operating abroad, this will help you massively when dealing with international suppliers.

Advanced elements - financing and risk

If you’re a little further down the road with the maturity of your procurement system - or you’re simply looking ahead - there are a few more complex financial tools and legal requirements to be aware of.

What is purchase order financing? And should you use it?

Purchase order financing is a short-term funding solution built for businesses that have secured a large order from a customer but don’t have the cash-flow to pay their suppliers in order to fulfil it.

In this instance, the lender will pay your supplier directly, ship the goods to the customer and then deduct their fees from the customer’s payment, sending you the remainder of the profit. Thus, it allows you to fulfill an order you wouldn’t otherwise be able to afford - you’ll just see a little less of the profit vs if you had the cashflow to pay your suppliers yourself.

The good thing about purchase order financing is it takes the credit worthiness of the customer into account. So if you’re an ambitious startup with big dreams but limited credit, PO finance can help you bridge the cash gap on a big order. The bad thing is the interest rates on the loan are fairly high - and you’ll typically only be able to use it for physical goods rather than services.

As for whether you should use it, PO finance is probably best reserved for high-margin orders that you don’t have the cash to fulfil. Better to meet a customer’s demands and make some money rather than none, after all - but it’s an expensive way of doing business that can be avoided if you’ve got a better handle on your cash flow.

Risk management and vendor management

A full blown purchase order system can do plenty more for you than track money. You can manage risk by better understanding your vendors. Once you have formalised agreements in place, you can run analyses that will highlight which vendor relationships are working well for you, and vice versa.

You can track performance - who’s missing delivery dates, who’s sent you the wrong items, and who’s never put a foot wrong. You can assess whether you’re too reliant on a handful of suppliers (a concentration risk) and diversify, if needs be. You can create codes of conduct for your suppliers that make your supply chains more compliance-friendly in an increasingly demanding, ethics- and sustainability-focused environment.

Essentially, once you’ve got a mature procurement tracking programme in place, it can be a streamlining tool for the efficiency of your external providers, as well as your own.

Now you’ve got your purchasing ducks in order - what about your payments?

As much as we’d love to provide you with an all-singing, all-dancing purchase order system, our expertise lies in another key area of your money management: payments.

We help small businesses like yours make light work of getting paid, reducing your admin burden while optimising the payment experience for both you and your customers. We can help you avoid failed payments, customer churn and payment fraud - all via automated, admin-free cardless payment infrastructure.

You can try it free for 90 days whenever you like.

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