What is a Purchase Order and How to Create One

Taylor Howe

3 years ago

As a business owner, tracking inventory and ordering supplies is one of your most essential tasks. While it may not be the most exciting of tasks, it’s essential for the success of your company.

To create a well-managed purchasing process, you need to use purchase orders. What are purchase orders? How do you create one? And most importantly, how can they help your business?

Read on to learn all that you need to know about purchase orders.

What Is a Purchase Order?

First things first, what is a purchase order, exactly?

A purchase order is a document that specifies the type and quantity of products, as well as the services a supplier is selling. A business’s purchasing department issues a purchase order with its suppliers or vendors. In the simplest of terms, a purchase order is a contract drafted by a buyer when purchasing goods from a seller.

At a minimum, your purchase order should contain the following information:

Purchase order number
The date of issue
Shipping details
The details of goods
The name and address of the buyer
The name and address of the seller
Terms and conditions

Businesses often use purchase orders when they want to buy inventory or supplies on an account, and they need to fulfill orders and process payments. Therefore, businesses create purchase orders before sending invoices, as they define the contract of the sale.

How Do They Work?

All kinds of businesses use purchase orders to buy goods in large quantities. For example, a restaurant franchise may need to buy large quantities of rice from a supplier. Or, a company that builds tiny homes may need to purchase a continuous supply of lumber.

Whatever the business is, purchase orders generally work the same across all industries. When a business owner notices that they’re low on inventory, they’ll create a purchase order that lays out exactly what they need from their supplier.

And, they also specify how much they’ll pay for it. If the supplier can provide those items, they’ll reply with a “yes” to the purchase order. If they’re out of stock, then they’ll reply “no.”

Next, the supplier fulfills the order and delivers it to you by the agreed-upon date. Once they deliver the items, they’ll then issue an invoice, which will be due by a certain date. Your business also has the option to create special orders for recurring shipments or especially large orders.

Different Types of Purchase Orders

There are different kinds of purchase orders that your business may find handy. These include:

Blanket Purchase Orders: This type of purchase order is best for businesses that need multiple deliveries for a set time period and for a set price.

Single-Use Purchase Order: As the name suggests, this purchase order is for businesses looking to keep track of a single, defined order until they’ve received all of the items from the supplier.

Contract Purchase Order: This type of purchase order sets out definitive, legally binding terms and conditions for future transactions. The legal nature of the order gives businesses reassurance regarding how much regular purchases will cost.

Planned Purchase Order: This type of purchase order outlines everything except for the delivery date. Businesses use planned purchase orders in anticipation of a future need.

Creating a Purchase Order

Now that you know about the different types of purchase orders let’s talk about how to create one. Here everything you need to include:

Products needed
Product Quantity
Date of issue
PO number
Delivery date
Business’s shipping and billing address
Company name and contact info
Terms of payment

Purchase orders look very similar to an invoice, and once you have the above information, you simply need to fill out the purchase order and send it to the supplier. In some cases, a purchase order will be a piece of paper or an emailed document.

However, if your business buys lots of products on a regular basis, it’s better to invest in a software program that can help you create and track your purchase orders.

Benefits of Purchase Orders

Purchase orders provide many benefits for both buyers and sellers. Here are the main benefits to consider:

For the Buyer

Purchase orders help buyers:

Avoid duplicate orders
Easily track your business’s inventory and purchase history
Choose a delivery date that works best for you
Don’t worry about paying in advance
Order goods in specific quantities in advance

For the Seller

Purchase orders also help sellers:

Track recurring orders and sales
Get buyers to commit to paying, giving you legal security
Keep track of incoming orders easily
Create invoices with purchase orders

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When Should You Use Purchase Orders

Now the question is- when exactly should you use a purchase order? You should use a purchase order any time you need to :

Track Inventory and Costs: Purchase orders help in the procurement process, as they allow businesses to track incoming orders and monitor stock levels
Maintain Accuracy: Purchase orders are necessary for maintaining accuracy within your business. When orders are recorded, you’re less likely to encounter duplicate or incorrect payments.
Legal and Accountable: If you want to put a price in writing, a purchase order is for you.

Differences Between a Purchase Order vs. Invoice

Alt-Text: Invoice

Many people use the terms purchase order and invoice interchangeably. However, they’re not the same thing. The key difference between these two documents is that a business sends a purchase order to a vendor to place an order, whereas a vendor sends an invoice to request payment for an order.

Most companies will use both purchase orders and invoices.

Conclusion

Now that you know what a purchase order is and how to create one, it’s time to get started. As we mentioned earlier, investing in the right software can make the purchase order process easier.

For your purchase order software needs, check out Fiddle.