What is Purchase Order?
A purchase order, or PO, is an official document issued by a buyer committing to pay the seller for the sale of specific products or services to be delivered in the future.
The advantage to the buyer is the ability to place an order without immediate payment. From the seller’s perspective, a PO is a way to offer buyers credit without risk, since the buyer is obligated to pay once the products or services have been delivered.
Each PO has a unique number associated with it that helps both buyer and seller track delivery and payment. A blanket PO is a commitment to buy products or services on an ongoing basis, until a certain maximum is reached.
What is on a Purchase Order?
Among other things, a PO specifies:
- Quantity purchased
- Product or service being purchased
- Specific brand names, SKUs, or model numbers
- Price per unit
- Delivery date
- Delivery location
- Billing address
- Payment terms, such as on delivery or in 30 days
How is a Purchase Order Used?
A PO simplifies the purchase process, which typically looks like this:
- Buyer decides to purchase a product or service for their business
- The company issues a PO to the seller, often electronically using a purchase order template
- The seller receives the PO and confirms the company can fill the order
- If not, the seller tells the buyer the order cannot be completed and the PO is cancelled
- If the order can be filled, the seller begins preparing the order by pulling the inventory together or scheduling necessary personnel
- The order is shipped, or service provided, with the PO number on the packing list so the buyer knows which order has arrived
- The seller invoices for the order, using the PO number so that it can easily be matched with the delivery information
- The buyer pays the invoice according to the terms laid out in the PO
Purchase Order Pros and Cons
There are many reasons to use POs, the most important of which are:
- Improved accuracy, in both inventory and financial management
- Better budgeting, since funds need to be available before a PO is issued
- Faster delivery, since POs help schedule delivery when the buyer needs it
As far as disadvantages go, there are few:
- More unnecessary paperwork for smaller purchases
- Credit cards can serve the same purpose from a financial perspective
