Outside of marketing, I’ve worked as a trainer and business owner. While I love the work I do, it’s just as important that I get paid for my efforts, so purchase orders (POs) are a big part of my day-to-day. A purchase order is a document that buyers send to suppliers to confirm their intention to move forward with their goods and services.
But, how do purchase orders work? Well, a PO lays down an agreement, which establishes the expectations of the transaction, as well as the buyer’s approval of the terms of payment. Purchase orders are commonly used for bulk orders involving larger transactions, or when buyers are involved in recurring relationships with the supplier.
To help you learn about purchase orders and successfully create your own, I’ll cover the following topics in this article:
Table of Contents
- What is a purchase order?
- Types of Purchase Orders
- How does a purchase order work?
- Advantages of Purchase Orders
- Purchase Order Format: What to Include on Your PO
- Purchase Order Template
- How to Create a Purchase Order
- How to Create a Purchase Order System
What is a purchase order?
A purchase order, or PO, is a legal document a buyer sends to a supplier or vendor to authorize a purchase. Purchase orders outline a list of products to buy. These agreements help both the buyer and seller document transactions.
Purchase orders are beneficial for both the buyer and seller. By issuing purchase orders, small businesses can specify what goods and services they need from their suppliers and when they’re needed by. A PO also allows the seller to ensure it can provide the goods and services requested before committing to fulfillment, giving the buyer time to plan accordingly.
Purchase Order vs. Invoice
So, is a purchase order the same as an invoice? No. But the two are often confused.
While purchase orders show the intent to make a purchase — and are created by a buyer — invoices outline the terms of payment and are created by a seller.
Both the purchase order and the invoice are legal documents that define the terms of the sale, but purchase orders are issued before a purchase is made, while invoices are issued afterward to confirm delivery of items, along with price and payment date.
To keep the two separate, here’s a list of features:
Purchase orders:
- Are created by the buyer.
- Are issued before a purchase is made or delivered.
- Specify the items to be purchased and at what price.
Invoices:
- Are created by the seller.
- Are issued after the products or services are delivered.
- Confirm delivery of items, along with price and payment date.
Free Purchase Order Template
Quickly get the supplies/services you need with this professional PO template.
- Product Codes
- Item Description & Quantity
- Shipping Costs
- And More!
How does a purchase order work?
Now that we know what a PO is — and how that differs from an invoice — I can explain how businesses use these documents in their accounting practices. While this is a realm filled with jargon, I’ll break it down in plain, simple English.
Before purchase orders are created and submitted, employees must get approval for an order from their organization, usually from the purchasing department. Once reviewed and approved, the PO can be created and sent to the vendor. And even if your company doesn’t have a formal procedure for creating a PO, you may still need to generate a PO to serve as a form of contract for your purchase.
Here’s how the purchase order process works.
1. First, the buyer creates a PO and generates a PO number.
After the approval of the purchase requisition (PR), the buyer creates a purchase order containing the details of the product, including the quantity, per-piece pricing, total pricing, and expected date of delivery.
For example, if you need to order new boxes to ship your products, you’ll calculate how many boxes you need and when you need them — and that information goes on your PO.
Next, the buyer generates a PO number. With the PO number and the information above, the buyer drafts the purchase order and sends it to the seller for approval, making sure to indicate the date that approval is needed by.
This date should give the seller ample time to deliver on schedule, and also give the buyer sufficient time to source from another seller if the PO is not approved.
2. Next, the seller reviews and approves the PO.
When the seller receives the PO, they review it for approval. If the request can be fulfilled, they approve the purchase order, which becomes legally binding for both parties.
Sellers can ask for amendments, for example, if the information is incomplete or they’re not satisfied with the terms of the PO. They also have the right to cancel the PO if it doesn’t meet their policies.
3. After approval, the seller creates an invoice.
Here’s where the invoice comes in. If the purchase order is approved, the seller issues an invoice with the terms of payment, including price breakdown, goods provided, quantity, and total amount owed.
Invoices should be standardized to ensure consistency, making sure no critical details are accidentally omitted. Tools like HubSpot’s free Invoice Generator do just that — just use the provided template, fill in the blanks, and have your invoice ready in a matter of minutes.
Regarding payment, the seller may request it before, during, or after the delivery date, depending on the terms.
To go back to the example of boxes, if the vendor has a net 30 payment term, it means that when the boxes are delivered, you’ll receive an invoice with your shipment, and then you have 30 days to pay from the date of the invoice.
4. Next, the buyer conducts purchase order matching.
When the buyer receives the invoice, they’ll review it to ensure that the information on the invoice matches the information on the purchase order. This process of comparing the invoice and PO is called purchase order matching.
5. Finally, the invoice is sent for approval.
Once the matching process is complete, and any discrepancies corrected, the invoice is sent for approval to the accounts payable (AP) department, where payment is released to the seller. It will depend on the terms of the payment agreement when payment is released (for example, now or in 30 days).
With this, the PO is closed, unless the seller has more items to deliver to fulfill the order.
Free Purchase Order Template
Quickly get the supplies/services you need with this professional PO template.
- Product Codes
- Item Description & Quantity
- Shipping Costs
- And More!
Advantages of Purchase Orders
Why would you want to use a purchase order? There are many reasons, but here are the highlights of how using purchase orders can help your business.
- Buy now, pay later. A PO lets you place an order for products and pay for them during or after delivery.
- Saves time for both parties. Digital POs and a PO system with automated workflows (both discussed below) mean a quick and seamless process.
- Provides legal protection. Purchase orders work as a legal document for buyers and sellers. Both parties can refer to this document if any concerns arise over the quantity of items, the pricing, the date of delivery, and so on.
- Manage budget spend. Businesses can use software to automate their workflow and track business spending. Most software updates in real-time so that the buyers can manage their spending right away.
Purchase Order Format: What to Include on Your PO
Ready to create your own purchase order? Here is the information you need to include.
1. Header. Provide your company details, including the company name, business address, purchase order date, and purchase order number.
2. Vendor information. Indicate the proper recipient for the purchase order. This is where you list the name of the seller company, your specific contact name, and the address of the seller company.
3. Ship to. Specify where the order should be sent, the shipping method, the shipping terms, and the intended delivery date.
4. Order details. For each product included in the order, provide a line item with the product code or SKU number, item name or description, quantity of units requested, the price per unit, and the delivery date of each item.
5. Summary. Complete the purchase order by providing a subtotal, any applicable discounts, taxes, shipping costs, and grand total.
Below, I’m sharing an example purchase order with all of these categories to help put the pieces together.
As you can see, you have the option of adding multiple products, so there’s no need to create different purchase orders per product. In addition, you can take discounts out of the final cost and take into account shipping and handling.
Purchase Order Example
Not sure what a purchase order should look like when all filled out? The PO example below checks all the boxes — it includes the customer’s information, the desired products, the shipping terms, and the PO number. Plus, it includes a note for the vendor. From what I’ve seen, this is a pretty standard PO and a great reference point to come back to if you need it.
Purchase Order Template
If you want to create your purchase order following the above format, download our easy-to-use purchase order template.
This template comes in two versions: an Excel version and a fillable PDF. I recommend using the Excel version to create multiple POs for a single supplier and the fillable PDF for one-off purchases.
The Excel template will automatically calculate the final cost for you, making it easy and simple to see your totals and discounts.
Types of Purchase Orders
- Standard Purchase Orders
- Planned Purchase Orders
- Blanket Purchase Orders
- Contract Purchase Orders
- Digital Purchase Orders
At this point, you might be thinking, “If you‘ve seen one purchase order, you’ve seen ‘em all,” but that’s just not true. I learned that there are actually five types of purchase orders, and they differ by how much information is included. I’ll explain them below.
1. Standard Purchase Orders
Standard purchase orders (like the example above) are the most widely adopted and are the easiest to use. In this situation, as the buyer I’m clear on the details of the purchase and can identify what item or service I’m buying, the quantity, delivery schedule, and payment terms.
Standard purchase orders should include the following:
- Delivery date.
- Number of items.
- List of items to be purchased.
- Terms and Conditions.
Best for: Standard purchase orders are best when sellers don’t expect to enter into a long-term contract with the buyer.
Standard purchase orders can be tailored to your needs, and could be adjusted for:
- Services to be rendered.
- Subcontracting.
- Consignment.
2. Planned Purchase Orders
When placing a planned purchase order (PPO), a buyer is estimating the future needs of their company for the item in question by submitting a purchase order in advance. Planned purchase orders are usually preferred for long-term contracts where the vendor provides items to the buyer at irregular intervals.
In this case, I’d be sure to detail items such as the item, price, and payment terms, but the quantity is based on an educated guess, and the delivery date is tentative.
Here’s what a PPO includes:
- Terms and conditions.
- List of items.
- Quantity.
- Price.
- Tentative date of delivery.
- Tentative location of delivery.
Best for: PPOs are considered best when a buyer expects delivery in parts from the seller. This could be because of a temporary contract, or perhaps if the buyer needs to plan their purchases and break down the payments into smaller installments. PPOs help with cost management since the buyer pays at the time of delivery.
3. Blanket Purchase Orders
A blanket purchase order (BPO) is also called a “standing order” where vendors enter into a recurring relationship with their buyers. BPOs are less precise than the standard purchase order since they contain unspecific delivery dates and quantities of the items.
A typical blanket purchase order includes:
- Terms and conditions.
- Discounts.
- List of items.
- Pricing.
Best for: Blanket purchase orders are used for future purchases or ones that involve consistent purchases from the vendor, and are best for simplifying the purchases and reducing the administrative costs.
4. Contract Purchase Orders
Contract purchase orders (CPO) are more of a legally binding contract between the vendor and buyer for future purchases. In this case, the buyer and seller sign a contract outlining the terms of the purchase before a purchase order referencing the contract is issued. This type of purchase order offers the most legal protection for those involved.
A CPO is often just an outline that lists the negotiated terms and all the necessary details between the two parties.
Best for: I’d say CPOs are best for creating a procurement contract between two parties that outlines the negotiated terms and conditions. Businesses should use CPOs when they enter into a long-term relationship with the vendor.
5. Digital Purchase Orders
Having a set process in place for purchase orders can help the procurement process move efficiently and be mutually beneficial for both buyers and sellers. I think digital purchase orders are a great way to accomplish this.
One easy way to create and share a digital purchase order is in Microsoft Excel or Open Office. You can find pre-existing templates when you open a new spreadsheet, click on More Templates, and search “invoice.” I already made the distinction between invoices and purchase orders, but you can find both under this keyword in Excel.
And, of course, you can also download HubSpot’s purchase order template a well.
Now that we’ve gone through the different types of purchase orders, let’s talk about what one process of purchase order creation can look like.
How to Create a Purchase Order
While there are many variations in PO systems, there are some general steps you can follow to create a new purchase order. Here’s my quick, painless guide to creating POs.
1. Submit banking details to your system administrator.
The first step of the purchase order process happens before you even touch your computer. Your accounting team needs to load your vendor’s details into the system. That includes their address and any banking information for direct deposit. You may need to collect this information yourself, or your accounting team may gather these items, depending on your company.
Example of this step: Kaitlin Milliken, program manager of the Freelance Network here at HubSpot, says, “When working with freelance writers at HubSpot, our team gathers the writer’s payment details. Then, the accounting team loads this information into the system.”
2. Make sure you have the right level of access.
Not every user has the ability to make PO requests. If you don’t have access, you’ll need to contact your account administrator for this.
Example of this step: Milliken shares that, “On my first day at HubSpot, I had to reach out to our IT team to get the right access. So, there’s a possibility you’ll need to swap your settings.”
3. Add in your purchase details.
Once you’ve entered the system, you’ll start adding details, like who the vendor is (usually from a drop-down menu), what type of work they’ll be doing, and your estimated spend. Once you fill everything out, save and send the request.
Example of this step: Milliken describes her process: “When onboarding a new external writer, I put in the information related to their business and note they’ll be working on content. From there, I estimate how much we’ll spend with them annually and set the end date for the PO to the last day of the fiscal year.”
4. Add in additional information requested by your company.
In some systems, you’ll get a summary of your request, and there may be additional fields that your company requires you to complete. If so, fill out these sections to the best of your ability. Once all the fields are filled out, save and submit.
5. Submit and watch your request go up the chain.
That’s it for your part! From here, you get to watch the request go up the chain of your organization until it has reached final approval.
Free Purchase Order Template
Quickly get the supplies/services you need with this professional PO template.
- Product Codes
- Item Description & Quantity
- Shipping Costs
- And More!
How to Create a Purchase Order System
Business doesn’t end after one purchase order is fulfilled. In supply chain management, there will always be an ongoing process to track. This is where I’ve seen how having a purchase order system eases the process.
A purchase order system is software that generates, tracks, and manages digital purchase orders in a streamlined and secure network. Without a system in place, important agreements can be lost in transition and cause friction between buyers and sellers dependent on one another.
To create a purchase order system from the ground up, here are some guidelines and steps to follow.
1. Determine the right forms for you.
Refer back to the types of purchase orders list and choose the purchase order format suitable for your business.
2. Design a workflow with outlined steps of the process.
To automate the process, you need to outline the steps necessary to take a purchase order from beginning to end. Create a step-by-step workflow showcasing interactions as well as where document data is inputted and transferred during the transaction.
3. Dictate role assignments and accessibility.
In your business, you need team members who know how to correctly assign roles to direct the workflow to completion. This same team will need to efficiently set access permissions to the stakeholders at hand so they can contribute to the order in a timely manner.
4. Begin, adhere to, and improve your purchase order system.
As you use and adhere to your PO system, you’ll have to actively collect feedback from both stakeholders and your own internal team. Figure out where certain steps can be improved and change them in your workflow. With time you’ll have a productive system going forward, and a smoother supply chain to manage.
Purchase Orders Lead to Stronger Relationships with Suppliers
Purchase orders benefit both you and your suppliers, ensuring there are no miscommunications throughout the purchase process. And, with the right template, as I learned from preparing lots of POs, purchase orders can be easy and simple to create — even if you don’t have a dedicated vendor relationship manager on your team.
Editor's note: This post was originally published in October 2019 and has been updated for comprehensiveness.
Free Purchase Order Template
Quickly get the supplies/services you need with this professional PO template.
- Product Codes
- Item Description & Quantity
- Shipping Costs
- And More!
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