Purchase Order: Everything You Need to Know

A company has to make purchases for business operations strategically. This request is generally submitted to the vendor in the form of purchase orders. A purchase order contains details on the type of goods or services a company requires from its vendors, the number of goods to be supplied, and sometimes the agreed-upon price and date of delivery of goods. The supplier then sends over the goods and corresponding invoice to the company for payment. 

Purchase orders are important procurement and accounts payable documents. They act as a purchase contract between the supplier and the company to specify the requirements. 

What is a purchase order?

Purchase orders are documents specifying purchase details a company requires from its vendors. Purchase order generation is an important step in the procure-to-pay process. A purchase order is sent to the supplier after a purchase is finalized. Hence, it is often used to verify the validity of a purchase or invoice when paying vendors. 

Types of purchase orders

Purchase orders come in different types. 

Standard purchase orders (PO)

Standard purchase orders are generated for one-time purchases or purchases for a single order. These purchase orders contain a single delivery date for when goods are to be delivered. 

Planned purchase orders (PPO)

Planned purchase orders are contracted purchases which have to be delivered over a period of time. These purchase orders contain estimated prices and quantities required by the company, payment terms and tentative delivery dates. 

The final delivery locations and dates are later determined between the company and vendors. 

Blanket purchase orders (BPO)

Blanket purchase orders are also long-term contracts between a company and its vendor, wherein the vendor will supply goods to the company for a period of time. The BPO contains details of the quantity of goods to be supplied in a single purchase. The company can exercise the purchase anytime within the time period. 

Contract purchase orders (CPO)

A contract purchase order is an agreement between the buyer and the supplier stating that the supplier will provide goods or services at a set price over a specified time to the buyer. 

The later issued purchase order when buying the goods will thus reference the contract purchase order for the price and quantity of goods to be supplied. 

Difference between sales order and purchase order

Sales orders and purchase orders are often mistaken to mean the same. However, this cannot be further from the truth. 

A purchase order is issued by a company to its supplier in order to specify the required purchase conditions. A sales order is then sent by the vendor confirming the supply of goods and details in the purchase order. 

For example, a company sends over purchase orders to their supplier for the purchase of office chairs. The supplier then sends over a sales order to the company stating the quantity and price of office chairs they would supply. Upon agreement from both parties, the transaction takes place. 

Purchase process in accounts payable

The purchase process in accounts payable is a long-winded process. 

Identifying needs

The purchase process starts with the procurement team or other business departments identifying the need for goods or services for the business. 

Purchase requisition

The employee initiating the purchase then fills out a purchase requisition stating the type and reason for purchase. This document then goes to the procurement department to take the necessary actions. The procurement department moves ahead with the purchase if necessary approval is obtained from the department or business heads. 

Selecting vendor

The procurement department then carefully selects the vendor for the purchase according to the quantity, quality and budget of the goods. Factors such as the size of the vendor and geographical location also contribute to vendor selection. 

Purchase order generation

After the vendor has been selected, a purchase order is generated and sent to the vendor stating the required quantity, types, delivery date and payment terms for the goods or services. The vendor may send over a sales order to the company to confirm the purchase. 

Goods received and inspection

After the purchase order and delivery dates are confirmed, the vendor delivers the goods along with a receiving report, which is to be signed by the company. The company may issue their own inspection slips after verifying the quality and quantity of the received goods. 

Invoice received

After goods are successfully delivered, the vendor sends over an invoice showing the amount due, line item details, payment method and payment terms. The invoice is sent to the AP team of the company. The AP team then processes the invoice for payment. 

Invoice matching

The AP team performs invoice matching to verify the validity of the invoice. In this process, invoices are matched with purchase orders and other relevant documents, such as receiving reports and inspection slips. If discrepancies arise beyond a set threshold, these are raised to a vendor, who sends a corrected invoice. 

Payment

Payment is initiated to the vendor after necessary approvals have been obtained, along with any late payment fees or debit memo adjustments. 

Benefits of purchase orders

Keep track of orders

Having purchase orders helps the procurement team keep track of goods they have ordered for the company. This also helps prevent double orders if another requirement arises for products already ordered. 

Contract planning and management

Since some purchase orders, such as contract purchase orders, act as an agreement between the vendor and buyer; they help manage and negotiate rates with other vendors. Since fixed rates for these goods have already been decided, they also help budget better for future expenses. 

Ensure the validity of invoices

Purchase orders are an important part of invoice processing since they are used to perform basic two-way invoice matching and other subsequent forms. Hence, purchase order invoices help you save money on unnecessary spending. 

Manage inventory

Purchase orders are also of great importance to suppliers as they use them to manage their inventory and better prepare goods for delivery. They might also use it as a reference document for invoices and compliance. 

How AP automation can help in purchase order management

Managing purchase orders and invoices can be a cumbersome task for your AP team. Adopting an AP automation solution can help reduce the hassle of managing multiple paper documents and processing AP manually from your accountant’s plate. 

Some AP automation vendors, like ClearTech, let you store all vendor documents, such as invoices, purchase orders, contracts or W9 forms, on a single platform, reducing the burden of document inventory. You can also automatically match invoices to their respective purchase orders and perform 2-way, 3-way or 4-way matching without any manual work. 

Conclusion

Purchase orders are purchase requests sent by buyers to suppliers stating the type and quantity of purchase required along with delivery dates. The supplier can send over a sales order to confirm the purchase. Purchase orders come in different formats, namely, standard purchase orders, planned purchase orders, blanket purchase orders and contract purchase orders. PO generation is an important part of the procure-to-pay process as it helps check the validity of invoices, manage purchases and plan contract negotiations. They also help the vendor in managing their inventory and planning for future deliveries. Implementing AP automation software can drastically reduce unnecessary paper purchase order management and automatically perform invoice matching. 

FAQs

• What are the four types of PO?

Standard purchase orders, contract purchase orders, planned purchase orders and blanket purchase orders are the types of purchase orders. 

• What is the purpose of a PO?

A PO acts as a request for goods and services from the buyer to the supplier. It is used to verify the goods which are received and invoices to be paid. Suppliers also use POs as a reference to fulfill purchases. 

• Who issues a purchase order?

The buyer issues the purchase order to the supplier. The procurement team of the company usually does this. 

• What is a PO invoice?

An invoice that has a purchase order associated with it is called a PO invoice.