Jennifer Farge, Head of Finance at Be the Business, a non-profit organisation providing support and advice to UK companies, believes a purchase order (PO) is best described as an "invoice in reverse."
POs offer businesses a range of benefits, from helping to keep tabs on expenditures, to allowing oversight and monitoring of stock levels and avoiding late invoicing errors. Here’s a closer look at how POs work and their benefits, and a guide on how to create your own.
What is a purchase order?
A purchase order is a legal document that shows a buyer’s intent to purchase goods from a supplier. It is used by a buyer to place an order with a supplier and is issued prior to delivery of these goods. A PO order includes details such as what goods a buyer wants to purchase, the quantity, price, payment terms, estimated delivery date and address.
How does a purchase order work?
Purchase orders are generated by a company and sent to a supplier or vendor for approval before a purchase is made. The supplier can review the PO and share feedback, such as whether or not they are able to fulfil the order in the required timeframe.
“Companies typically use POs whenever they’re preparing to make a purchase where spending is significant or needs to be tracked very closely, as a PO specifies what the buying company is purchasing in order to reduce the risk of a supplier error,” says Farge. In this way, it protects both the buyer and seller, making it a key tool in reducing business risk. "Using a PO means that should a dispute arise with a supplier, you have a legal document which clearly states what your expectations were as the buyer and vice versa.”
Steph Douglas, CEO of online gifting service Don’t Buy Her Flowers, uses POs when payment isn’t immediate, such as when ordering from her network of suppliers. She sends a PO to a supplier when she places an order, which can be as often as every month and most are on 30-day payment periods from delivery or from the date ordered. Longer payment periods can make tracking orders and unpaid invoices challenging, a task that she says POs help her with. “POs allow us to match payments in and out to invoices, which is critical for accounting.”
Purchase orders make it easier for businesses to track cash flow, as you can see what is going to be paid out and when. With extended payment terms of up to 54-days¹, the American Express® Business Gold Card helps business owners go one step further by giving them greater control and flexibility on when these expenses are paid.
Is a purchase order legally binding?
"Simply, yes,” says Farge. Once a buyer and seller agree to the terms and conditions listed in the purchase order, usually by way of both parties signing a contract or agreement, a PO is issued that becomes legally binding, she explains. “If you don’t already have an existing contract as a buyer or a seller in a business relationship, a purchase order can be used in its place.”
Purchase order vs. invoice
The key difference between a PO and an invoice is timing. A PO is created by a buyer to outline what they intend to purchase from a supplier and when they need it delivered, and is sent before the goods are delivered. An invoice is created by the seller and sent to the buyer after the goods have been delivered. It tells the buyer how much money they need to pay, to whom and by when.
“A PO represents an agreement between two parties, which has been established by an offer and acceptance of that offer,” explains Farge. In this way, a PO is a contract of the sale, while an invoice is the confirmation of that sale.
Types of purchase orders
Standard purchase order
Standard POs are generally used for a one-off or infrequent order. It will outline the items to be purchased, quantity, price and timeframes for payment and delivery.
Planned purchase order
A planned PO is the same as a standard PO except for the delivery dates and locations that are tentative or unknown. They’re often used when a company requires a steady supply of goods but doesn’t know when they will need to be restocked.
Blanket purchase order
Blanket POs are for ongoing orders between a buyer and seller, to deliver goods at an agreed price, on a recurring basis, over a given period of time. For example, if an organisation can see that it submits several POs per month to the same supplier, such as an office cleaning provider, it can aggregate these into a single blanket PO.
Contract purchase order
Here the buyer and seller enter into a contract before creating a purchase order. It states that there will be purchase order in the future and provides guidelines on when they will likely occur. A PO is then raised against the contract and must meet its requirements.
How to create a standard purchase order
Let’s work through an example of how to create a PO using our guide below. If you have several suppliers that you use regularly, you could create a standardised guide for each supplier. That way, it will be much quicker to generate POs when you need to.
Step one: Customisation
Enter your company name, address and telephone number alongside. Add a section for the supplier’s details, including their company name, address and telephone number. When you’re ready to submit a PO, you'll need to include the date and the PO number - which is simply a unique reference code assigned to a purchase so they're easily identifiable in future.
Step two: Add order details
Add a shipping address, delivery date and payment terms. Then list out the name, quantity, unit price and total price of the goods you wish to purchase.
Step three: Send the PO to the supplier
Send the PO to the supplier for their review. The supplier will check the PO to ensure all details are correct and that they are able to fulfil the purchase request. They will also check payment and delivery terms and if required, suggest amends. Once the seller is happy with the PO, they will sign and send it back to you. At this point, it is legally binding.
Step four: Delivery of goods
The supplier will deliver the goods as agreed in the PO. Once this has been completed, they will create and submit an invoice to you for payment. Once you’ve made the payment, the invoice and PO are settled.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
