A purchase order (PO) is an official document issued by a buyer that commits them to pay a seller for specific products or services that will be delivered in the future. It acts as a formal agreement that defines the details of the purchase before the transaction is completed.
For buyers, purchase orders make it possible to place orders without making immediate payment. For sellers, a PO provides a level of financial security because the buyer becomes legally obligated to pay once the goods or services have been delivered.
Each purchase order includes a unique identification number that helps both the buyer and the seller track orders, deliveries, and payments. Some businesses also use a blanket purchase order, which allows multiple purchases over time until a specified spending limit is reached.
Information Included in a Purchase Order
A purchase order typically contains several important details related to the transaction.
- Quantity of items being purchased
- Description of the product or service
- Brand names, SKUs, or model numbers
- Price per unit
- Delivery date
- Delivery location
- Billing address
- Payment terms, such as payment on delivery or net 30 days
How Purchase Orders Are Used
Purchase orders help simplify the procurement process between businesses. A typical workflow may follow these steps:
- The buyer decides to purchase a product or service.
- The company creates and sends a purchase order to the seller, often electronically using a purchase order template.
- The seller reviews the order and confirms whether it can be fulfilled.
- If the seller cannot complete the order, the PO is canceled.
- If the seller accepts the order, they prepare the items or schedule the service.
- The products are shipped or the service is delivered, usually with the PO number referenced in the documentation.
- The seller issues an invoice referencing the purchase order.
- The buyer pays the invoice according to the agreed payment terms.
Advantages of Purchase Orders
- Improved accuracy: Helps businesses track orders and inventory more precisely.
- Better budgeting: Companies can monitor spending before purchases are finalized.
- Organized procurement: Purchase orders provide clear documentation for both buyers and sellers.
- Clear delivery scheduling: Sellers know exactly when goods or services are required.
Disadvantages of Purchase Orders
- Creating POs may add administrative work for small purchases.
- In some cases, businesses may prefer using credit cards or direct payments instead of issuing formal purchase orders.
