You can let your supplier know your intention to buy their goods using a purchase order. Purchase orders also significantly help organizations and businesses control their spending, streamlining how they acquire goods and services, ultimately enhancing their gross profit.
Every business must know how to create a purchase order, including how it works and the various types of purchase orders they can explore. Thankfully, you can learn all of these in this article.
Let’s get straight into purchase orders.
What Is a Purchase Order?
A purchase order is a legal document buyers send to their vendors or suppliers for purchase authorization. Otherwise regarded as PO, this type of document outlines your purchase needs and the quantity of goods or services you would want your supplier or vendor to deliver. Businesses often use purchase orders for formal purchase transactions documentation and monitoring stock levels.
Purchase orders have multiple benefits for businesses. One benefit is the involvement of purchase orders in record keeping. Therefore, not knowing how to create one may be detrimental and costly to your business.
Purchase orders often have numbers called purchase order numbers (PO numbers). A PO number is typically listed on delivery notes and invoices, helping businesses track what they've bought.
Similarly, while helping buyers keep a record, purchase orders also help suppliers or vendors minimize their supply errors, receive accurate and prompt payments from their buyers, and maintain detailed and accurate records for financial statements. In essence, purchase orders create a win-win situation for both buyers and suppliers.
Since purchase orders are binding contracts , these legal documents can benefit your business in the following situations:
- It helps you to keep track of large order requests.
- It enables you to track payments to various vendors.
- This document also helps in record-keeping for auditing purposes.
- You can also use a purchase order to specify the transaction terms between you and your supplier or vendor.
Here is an article to learn more about purchase orders.
How Purchase Order Works
Having understood what a purchase order means and the various benefits it offers, let’s now understand how the document works.
Below are the stages involved in implementing a purchase order – i.e., how a purchase order works:
Stage 1: Buyer decides to order products from vendor
The first stage is identifying a need in your business and the corresponding product you need. The business, in this case the buyer, decides to order products from a seller, vendor, or supplier. The order includes the quantity of product required, and when they may need the products again.
Stage 2: The buyer creates a purchase order and sends it to the vendor for approval.
After deciding to order items from your vendor, the next phase of purchase order implementation is drafting and sending it to the vendor for approval.
Ideally, the purchase order sent by the buyer should include the product(s) needed, quantity, delivery date, and other details.
Stage 3: The vendor reviews the purchase order and offers feedback.
In this stage, the vendor or supplier reviews the purchase order you've sent and gives you feedback on whether they can fulfil the order within the desired timeframe. The vendor would check their inventory to confirm product availability, price, and other essential elements. The approval process should be quick to ensure the product is delivered in a timely fashion, or otherwise let you know they cannot fulfil the order so you can find another vendor.
If they can deliver as required, the seller is expected to approve the purchase order and sends it back to the buyer for confirmation. Such approval makes the document legally binding.
Stage 4: Fulfilment of product or service.
After approval, the vendor or supplier should provide the product or service based on their agreement. This stage also includes generating an invoice to the buyer, stating the product's amount or service charge as indicated on the already approved purchase order. The invoice should also reference the PO number for good accounting.
Stage 5: Payment of invoice.
This is typically the final stage of the purchase order or business transaction . Here, the buyer – you – need to pay the amount stated in the invoice sent by the supplier or vendor.
Stage one (1) to stage five (5), as outlined above, illustrates the general way purchase order works. Of course, there might be slight modifications, depending on the type of transaction, type of purchase order, etc.
Here is an article about how purchase orders work.
Types of Purchase Orders
Now that you know how purchase order works, next is understanding the different types of purchase orders available.
While all purchase orders aren’t created equally, there are just four (4) types of purchase orders . The major differentiating factor between each of them is the extent of information included in each. Types of the purchase order are:
- Standard Purchase Order : This is the most commonly used type of purchase order. It specifies the basic information, including the item you are buying, the quantity to be delivered, delivery schedule, payment terms, etc.
- Planned Purchase Order : Planned purchase orders are legal documents requesting the purchase of items in advance. Often, this type of purchase order contains estimated quantities and delivery schedules. It is particularly beneficial to suppliers as it helps them plan accordingly, ensuring they meet your needs.
- Blanket Purchase Order : This is basically a commitment kind of purchase order. It makes you promise your vendor to spend a certain amount over a period of time. A business essentially commits itself to buy products up to a particular budget.
- Contract Purchase Order : Contract purchase orders specify the terms of an upcoming purchase order before its completion. Buyers often use this type of purchase order for expensive or large orders. Contract purchase orders offer a higher level of legal protection to both the buyer and vendor or seller.
Here is an article about the types of purchase orders.
How To Create a Purchase Order – Step by Step
Below is the step-by-step process to create a purchase order for your next business purchase:
Step 1: Create a Header.
This is the first step when creating a purchase order. Every purchase order must have a header specifying information, such as your business name and address, the purchase order date, order number, etc.
Step 2: Specify the Supplier’s Information.
After the header, carefully indicate the information of the supplier to receive the purchase order. Information required includes the name and address of the supplier's company, your specific contact name, etc.
Step 3: Specify the Shipping Location.
Here, you specify the destination of the order, how the order should be shipped, plus the terms of shipping. You may also include the delivery date, especially for standard purchase orders.
Step 4: Provide Order Details
You can include more than one product in a purchase order. In such a case, ensure you provide the details of each product, including the product code, name, description, quantity required, price per unit, etc. You may include the delivery date of each product if you want them delivered separately.
Step 5: Order Summary.
Finally, summarize your order. This includes the subtotal of every intended purchase. This should also include any applicable discounts, shipping costs, taxes, and the grand total.
Here is an article about how to create a purchase order.
What’s Typically Included in a Purchase Order?
Below is information generally included in a purchase order, regardless of type. Familiarizing yourself with these included details is an excellent way to learn how to create a purchase order!
- Supplier, vendor, or seller’s information.
- Buyer information.
- Purchase order number.
- Order date.
- Product or service description.
- Billing address.
- Shipping address and date of scheduled delivery.
- Buyer and supplier signature.
Get Help with a Purchase Order
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