What Is a Purchase Order?

Learn why do you need purchase orders for your business.

Domas Bitvinskas

Co-founder, Atlasmic

When you’re running a small business, a lot can go wrong. Let’s take supply management for example. In an ideal world, it would be as simple as you making an order, paying for it, and receiving the goods.

However, we don’t live in a perfect world and accidents can and do happen. It can take as much as one mistyped letter to deliver goods at the wrong address, ship the wrong quantity, or charge the wrong amount.

While it might seem like a small, fairly easy-to-fix issue, it can actually lead to shipment and restock delays, shortages, payment issues, and more. And unfortunately, in this high-paced world, a few bad orders can tarnish your business reputation irreparably.

Here’s where purchase orders come in to help you.

What is a purchase order?

A purchase order is a legal document that a buyer presents to a supplier or store, authorizing the purchase. Inside you will find information about the ordered products, quantity, price, taxes, shipping, and billing addresses, and other essential information.

Purchase orders (also often called POs) serve to protect both the seller’s and buyer’s interest, by officially documenting the transaction. It clearly communicates the request made to the seller and serves to prevent confusion.

Here’s an example of how a purchase order might look:

Do purchase orders have legal weight?

A purchase order is indeed a legally binding contract for both the seller and buyer but it is working only if it is accepted by the vendor.

If the buyer refuses to pay for the order, the seller is protected and can start legal action. And of course, it works both ways – if a buyer has made a payment but the seller refuses or is unable to complete the order.

The benefits of using purchase orders

Purchase orders, like many other documents, might not help you produce more sales but will definitely allow you to keep better track of business. Here are a few benefits of using purchase orders:

Purchase orders allow you to track orders easily

If you’re receiving a lot of incoming orders, your fulfilment team can get quickly overwhelmed without the right documentation. A bulletproof PO system will help keep track of supply, shipping, fulfilment dates, and other technical details.

Prevent duplicate orders

This is one of the key benefits of implementing a purchasing order system. Using POs to match them to invoices will help make sure you’re sending the right products in the right quantities, especially when scaling your business

Purchase orders serve as legal documents

When inevitably a dispute happens, a purchasing order can be used as a legal document, confirming a transaction or order.

Documentation helps prevent fraud

An efficient procurement tracking system will help you easily identify fraudulent payments, faulty invoices, and other errors or attempts at scams.

A more in-depth look into your finances

A digitized system won’t just help track purchase orders but see other data related to them. Here you’ll be able to view paid and unpaid orders and get a better idea of how money flows into your business.

Purchase orders simplify audits

If you ever get audited, purchase orders will make it much easier to collect and cross-check data. All you need to do is compare the POs to invoices and packing slips. A long, difficult process, becomes far simpler.

Are invoices and purchase orders the same?

No, despite the two documents having similar contents, invoices and purchase orders are not the same. First of all, an invoice is created by the seller. Invoices are typically used to collect a payment, especially when specific terms are involved. Alternatively, an invoice can be sent as a way to confirm and record a received payment.

However, POs will almost always mention the invoice number, and vice versa, to make sure the two documents are linked. This simply serves to make organization and documentation easier.

It’s also important to note, that invoices typically do not contain information about shipping, technical information, and other data.

Here's an example:

Imagine you need to order a new computer for your home office. First, you create a purchase order that has the details of your order: the product you’re buying, quantity, shipping details, technical and additional information. You sent this PO to the seller – the company that will fulfil your order.

After they confirm that they have your requested items in stock, they can approve the purchase order and you can pay them through the available payment method. After the payment is processed and received, the seller will send your order, provide you with shipping details, tracking numbers, and an invoice.

Depending on the type of invoice, it will confirm that the transaction is complete – you paid for your products, or include details on how to pay for the order, along with the due date, if you have not.

You can use the invoice to compare it to the PO to make sure you paid for the right products. Additionally, you can compare both the PO and invoice to the shipping and packaging slip – this is called three-way matching (learn more).

Are sales orders and purchase orders the same?

Similar to invoices, sales orders serve a different purpose and aren’t the same as purchase orders. Sales orders are generated by sellers and suppliers and act as a confirmation of the sale. We also wrote an article about sales orders if you are interested in learning more (click here).

Should you automate the purchase order process?

Let’s face it, paper is on its way out. Not only are physical documents detrimental to the environment but are inconvenient to store. You need to worry about storage space, filling systems, and much more. Not to mention that physical documents can get easily misplaced, damaged, or even destroyed.

Letting this happen will eventually lead to missing transaction data, issues when filing taxes, and a host of other problems that will cost you time and money.

Luckily, there are plenty of software systems that digitize the purchase order process, along with invoices, sales orders, and other documents. This makes it much easier to store and locate required data. On top of that, by implementing data backups you are protecting yourself from data loss.

Conclusion

Purchase orders are a must-have document for any business dealing with physical supply, and can definitely help those dealing with digital goods or services.

Implementing a purchase order system will help you keep track of your company’s finances, identify fraudulent payments, and document growth.

On top of that, purchase orders help avoid issues that can occur during the shipping, resupply, and other order fulfilment processes.

Lastly, it’s essential to remember that this document serves as a legally binding document from the moment it is approved by the seller. This will help you protect your business if issues happen to occur.

However, it is best to implement a digitized e-procurement or purchase order process administration system. Not only will it make the environment greener but make data storage and management much easier.

More for your business growth