What is a purchase order? Definition, types and how it works

A purchase order or PO is a formal document you send your supplier to order specified goods or services. It records details of the order such as item list, quantities, agreed prices, delivery requirements and payment terms.

Moreover, a PO can also be used as a part of the contractual record between you and the supplier. Whether the purchase order itself acts as the contract depends on the order terms, agreement and how the supplier accepts it.

A master supplier contract already covers your transaction with the vendor, and a PO may operate as an order issued under it rather than being a standalone contract.

Beyond documenting a purchase, POs also give buyers and suppliers a clearer record to rely on if a dispute arises. Here’s everything about what a purchase order is, and how to build an efficient system to manage it end-to-end.

Why do businesses use purchase orders?

Purchase orders help you control your business spending before the invoice arrives. An optimal purchase order process can:

• Authorise spend before a business can commit to a vendor
  
• Record the agreed quantity, price, delivery and payment terms
  
• Show committed spend against a specific budget, prior to making the payment
  
• Give accounts payable a reference for checking the supplier’s invoice against the items received
  

Purchase order vs invoice: How do they differ

For new founders, this might be a bit confusing, as both a purchase order and invoice deal with buying goods from vendors. However, these two documents are used at different stages of the whole transaction, and are created by different parties.

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Vendors generate invoices against the purchase orders. They reference the PO number, item list, quantities, prices and payment terms from the purchase order, and submit it via your preferred channel.

Types of purchase orders

There are four common types of purchase orders, including:

• Standard purchase order
  

It is used for infrequent, one-off or irregular purchases. Moreover, it’s best when the item, quantity, price and delivery date are known for a specific one-off purchase. For instance, a restaurant owner can raise a standard purchase order for new chairs and tables.

• Planned purchase order
  

These types of POs outline the need for specific items, their prices and quantities for future needs, leaving the delivery dates tentative. Use it when the overall requirement is known, but the individual delivery or release dates will be confirmed later. For instance, a restaurant plans an order for 20,000 disposable cutlery in one year. Now, the owner can order 2,000 of them in the first individual order, and place subsequent orders as the existing lot runs low on stock.

• Blanket purchase order
  

It is used specifically for long-term agreements with suppliers, covering your recurring purchases, under a single contract number. Use it for making recurring purchases from the same supplier when exact quantities or delivery dates may vary within an agreed spending limit or time period. For instance, a restaurant owner, if unsure of the quantity of disposable cutlery required in a year, can choose a blanket PO for the case.

• Contract purchase orders
  

These POs are used for setting terms of supply and agreement between you and your supplier for ongoing commercial relationships. The specific goods or services may be ordered later through individual releases or other ordering documents. Unlike other types, contract POs don’t specify the items upfront.

Note: The terminology and exact use of these purchase order types may vary depending on the procurement system. So, it’s worth confirming how your supplier or system defines each type before setting up the process around them.

What information should a purchase order include?

A purchase order typically consists of:

• Unique PO number
  
• Buyer details
  
• Supplier or vendor details
  
• Order date
  
• Description of goods or services
  
• Quantity and per-unit price
  
• GST treatment, if applicable
  
• Delivery address and required delivery dates
  
• Payment terms
  
• Relevant quotation, project reference or contract
  
• Any agreed terms and conditions
  

Though these are the common components of a PO, the exact fields depend on your business and procurement system in use. A PO records your approved order, and doesn’t guarantee payment simply because the goods arrive. The supplier is still required to satisfy the agreed terms and invoicing process for payment to occur.

What is a purchase order number and how to create one?

Purchase order numbers are unique identifiers used to identify POs and connect them to related documents such as supplier receipts, invoices and payment records. Your supplier will reference a PO number on invoices and shipping documents, saving time on matching orders and reducing errors.

Services Australia, for example, requires suppliers to quote the relevant PO number on invoices connected to its orders.

There’s no universal format for PO numbers. An example of a PO number might look like PO-2026-0042. However, a good numbering system should generally be:

• Unique, with no duplicates across any active orders
  
• Consistent in format across the business
  
• Sequential for being more traceable
  
• Difficult to duplicate, even by accident
  

It is worth keeping the PO number format simple rather than adding vendor, project or date details manually. This becomes even more important if your procurement system already stores the metadata separately and can surface it easily without the need for being embedded in the number itself.

You can create a purchase order number in a few ways, including:

• Manual efforts: You can simply start numbering your POs from 001 and track them using a spreadsheet or a custom template
  
• Use purchase order software: Dedicated software can be helpful in assigning and tracking PO numbers automatically. It will reduce the need for spreadsheet tracking and the possibility of duplicate referencing.
  
• Use comprehensive order management systems: If you have an order management system in place, you can automatically assign numbers to your purchase orders, which will then send the confirmation details.
  

How does the purchase order process work?

The purchase order process undergoes two approval stages, including approval of the purchase itself before issuing a PO, followed by approval of the invoice for payment after the supply is complete. Here’s how the full process usually works:

1. Purchase request or requisition
   

Someone from within the business requests a purchase, providing the reason, preferred vendor, tentative quote and budget details. It is an internal step and happens before the PO is created.

1. Internal approval
   

The request is then checked against your company’s approval policy and available budget before you can commit to the purchase.

1. Creating and issuing PO
   

Once the purchase is approved, you then create a PO with a unique number and authorised terms. It is then sent to the supplier.

1. Supplier acceptance and order confirmation
   

The supplier then reviews the PO and either accepts it, confirms it or proposes certain changes.

1. Goods or services received
   

You must then record what goods are actually delivered or what services are completed, matching it against the PO specifications.

1. Supplier invoice received
   

The vendor then issues the invoice by referencing the PO number, wherever required.

1. Invoice matching and exceptional handling
   

The accounts payable automation system then performs either a two-way match (PO-invoice) or a three-way match (PO-receipt-invoice), to confirm alignment. If there are any discrepancies in quantity, price, delivery, GST (if applicable) or duplicate invoices, it will be investigated and resolved with the supplier before proceeding with invoice clearance.

1. Invoice approval and payment
   

Once the invoice satisfies the internal policy, accounts payable will approve it and schedule payments according to agreed terms. Payment may be made through wire, cheque, ACH or virtual card, as applicable.

Example of a purchase order

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When should you use purchase order software?

A spreadsheet works well when your purchase volume is low, and one person is behind controlling the process. However, purchase order software becomes more useful when:

• Multiple employees request purchases
  
• Approvals depend on amount, category or entity
  
• Finance team needs more visibility into committed spend before the invoices arrive
  
• Vendors and PO numbers are growing difficult to track manually
  
• Invoice-to-PO mismatches require strenuous manual investigation
  
• Accounting teams are re-keying the same information between multiple systems
  

If any of these challenges sound familiar, you must consider purchase order software rather than continuing to patch together email approvals and spreadsheets.

Aspire Procure connects spend requests, approved vendors, approved workflows, purchase orders, bills, payments and accounting sync, all within the Aspire finance platform. Here, approved bills can be matched against purchase orders seamlessly, with all differences automatically flagged for review before payment.

By keeping the request, supplier, PO, bill and payment in one workflow, you can reduce manual reconciliation and make it easier to investigate exceptions.

PO management, real-time visibility, multi-level approval workflow and bulk payments are all handled through the same Aspire finance platform. Explore Aspire Procure to know more.

FAQs

Why do business founders use purchase orders?

Businesses use POs to approve spending before committing to a supplier, document the items ordered, track committed spend and provide accounts payable a reference for matching supplier invoices and deliveries. Depending on the contractual arrangement, a PO can also form part or all of the agreement between you and the supplier.

What is the difference between a purchase order and purchase requisition?

A purchase requisition is an internal request for approval, typically filled out by an employee on behalf of a team or department, asking permission to purchase certain goods or services. On the other hand, a purchase order is the external order or commitment sent to the supplier, once the request is approved internally.

When should I pay the supplier?

You will pay as per the agreed contract, invoice terms and PO. Depending on the purchase, this may mean a deposit, milestone payment, payment post-delivery, or on some other agreed schedule. The payment terms can vary significantly from one supplier or contract arrangement to another.

So, it is better to confirm the terms upfront. Before you release the payment, follow your invoice approval or matching controls to confirm the items, terms and amount, ensuring they align with what was ordered and received.

When should your small business start using purchase orders?

There is no fixed size at which every small business needs POs. They become especially useful once more than one person can commit spend, purchases need prior approval, suppliers request PO numbers, or finance needs to track committed spend before invoices arrive.

What is the difference between a purchase order and sales order?

A purchase order is somewhat similar to a sales order, but they are used for serving different purposes and move in opposite directions. A purchase order goes from the buyer to the supplier, indicating the goods or services being ordered. On the other hand, a sales order goes from the supplier back to the buyer, confirming the order details within their own system as they process and fulfil the sale.

Is a purchase order legally binding in Australia?

A purchase order can form part or all of a binding contract, but the answer depends on the terms, any existing contract between the parties, and how the supplier accepts the order. For important or high-value arrangements, make sure the applicable contract and PO terms are clear rather than assuming the PO alone determines every legal obligation.

Do I need a purchase order number on an invoice?

Not every invoice legally requires a PO number, but many organisations require suppliers to include one so accounts payable can match the invoice to the approved order. Check the buyer's procurement requirements before invoicing.