What Is a Purchase Order? Types, Process, and Management Guide

What is a Purchase Order?

A purchase order is a commercial document issued by the buyer to the supplier, specifying the goods or services from a vendor to be purchased, along with quantities, prices, and terms. It serves as a formalised agreement between the buyer and the supplier, outlining critical details such as payment terms, delivery dates, and product specifications. Understanding what a purchase order is and its importance can help businesses streamline procurement processes and improve supplier relationships.

The purchase order (The PO) is a legally binding document. Once accepted by the supplier, it becomes a contract that obligates both parties to adhere to the stipulated terms. This legal framework ensures that all parties are clear on their responsibilities and expectations, minimising the risk of misunderstandings or disputes.

Since purchase orders are sequentially numbered, they provide an audit trail for businesses. By providing a clear and concise record of the transaction, purchase orders help protect both buyers and suppliers from potential issues that could arise during the procurement process. Additionally, purchase orders can serve as a valuable tool for financial planning and budgeting, as they provide a detailed overview of upcoming expenditures.

Types of Purchase Orders

There are several types of purchase orders, each serving a specific purpose and used in different scenarios. Understanding the different types of purchase orders can help businesses manage their purchasing process more efficiently.

Standard Purchase Order

A standard purchase order is the most common type, used for one-time purchases of goods or services. It includes detailed information about the items being purchased, such as quantities, prices, and delivery schedules. Standard purchase orders are typically used when the buyer knows exactly what they need and when they need it.

This type of purchase order is ideal for straightforward transactions where the buyer has a clear understanding of their requirements and the supplier can meet those needs without issue. Standard purchase orders provide a high level of detail, which helps ensure that both parties are aligned on the specifics of the transaction, reducing the likelihood of errors or discrepancies.

Planned Purchase Order

A planned purchase order is used when a buyer anticipates a future need for goods or services but does not have specific details about quantities or delivery dates. This type of purchase order allows businesses to plan their procurement activities in advance, ensuring they are prepared to meet future demand.

Planned purchase orders are particularly useful for businesses with fluctuating demand or long lead times. By providing a framework for future purchases, planned purchase orders help businesses maintain flexibility while ensuring they can quickly respond to changes in demand. This proactive approach to procurement can help businesses avoid stockouts and ensure they have the necessary resources to meet customer needs.

Blanket Purchase Order

A blanket purchase order is an agreement between a buyer and a supplier to purchase a specified quantity of goods or services over a set period. This type of purchase order is used for recurring purchases, allowing businesses to negotiate better terms with suppliers due to the guaranteed volume.

Blanket purchase orders help streamline the purchasing process by reducing the need for multiple purchase orders and approvals. By consolidating purchases into a single agreement, businesses can reduce administrative overhead and improve efficiency. Additionally, blanket purchase orders can help businesses achieve cost savings by locking in prices for a specified period, protecting against price fluctuations.

Contract Purchase Order

A contract purchase order is similar to a blanket purchase order but is more formalised and legally binding. It outlines the terms and conditions for a long-term agreement between the buyer and the supplier, including pricing, delivery schedules, and other key details.

Contract purchase orders are typically used for complex or high-value transactions where a detailed agreement is necessary to ensure both parties are protected. By providing a clear framework for the relationship, contract purchase orders help minimise risks and ensure that both parties understand their obligations. This type of purchase order is particularly beneficial for businesses that engage in large-scale projects or require specialised goods or services.

The Purchase Order Process

The purchase order process is a critical component of the purchasing process, involving several steps from the creation of a purchase requisition to the final payment. Understanding each step of the process can help businesses improve efficiency and accuracy in their procurement activities.

Create a Purchase Order

To create a purchase order, businesses need to have a clear understanding of their purchasing needs and requirements. The purchase order form should include essential information, such as the PO number, date, supplier information, and product details. At the bottom of the purchase order, you can place a dotted line for the authorised manager of the seller to sign off on the order.

Businesses can use purchase order templates or software to streamline the purchase order creation process and improve accuracy. The purchase order should be reviewed and approved by the purchasing department before it is sent to the supplier. This step ensures that all necessary information is included and that the purchase aligns with the company's procurement strategy.

By standardising the purchase order creation process, businesses can reduce the risk of errors and ensure that all relevant details are captured.

Purchasing Reviews and Approves the Purchase Order

Once the purchase order is created, it undergoes a review and approval process by the purchasing department. This step ensures that all details are accurate and that the purchase aligns with the company's budget and procurement strategy.

Approval is a crucial step in preventing errors and unauthorised purchases. By carefully reviewing each purchase order, businesses can ensure that they are making informed purchasing decisions and avoiding unnecessary expenditures. This review process also provides an opportunity to negotiate better terms with suppliers or explore alternative options if needed.

Send a Purchase Order to the Supplier

After approval, the purchase order is sent to the supplier, either electronically or via traditional mail. This step formalises the request and initiates the supplier's fulfilment process. Clear communication with the supplier at this stage is essential to ensure that all terms and conditions are understood and agreed upon.

By providing the supplier with a detailed and accurate purchase order, businesses can minimise the risk of errors or misunderstandings during the fulfilment process. Additionally, maintaining open lines of communication with suppliers can help build stronger relationships and facilitate smoother transactions.

Supplier Approves the Purchase Order

Upon receiving the purchase order, the supplier reviews it to ensure that they can meet the specified requirements. Once confirmed, the supplier accepts the purchase order, making it a binding contract. This acceptance marks the beginning of the supplier's obligation to deliver the goods or services as agreed. By accepting the purchase order, the supplier agrees to adhere to the terms outlined in the document, providing assurance to the buyer that their needs will be met. This step is crucial for establishing trust and accountability between the buyer and supplier.

Customer Receives and Inspects Goods or Services

When the goods or services are delivered, the buyer inspects them to ensure that they meet the specifications outlined in the purchase order. The buyer verifies that the goods or services are in good condition and that the quantity and quality meet the requirements. If there are any discrepancies or issues, the buyer notifies the supplier and resolves the issue.

The buyer updates the inventory management system to reflect the receipt of the goods or services. This step is crucial for maintaining accurate records and ensuring that the business has the necessary resources to meet its operational needs. Timely and thorough inspections can help identify any issues early, allowing for prompt resolution.

Invoice Approval and Payment

After the goods or services are delivered, the supplier sends an invoice to the buyer. The buyer reviews the invoice to ensure that it is accurate and complete. The buyer verifies that the invoice matches the purchase order and that the prices and quantities are correct.

Once the invoice is approved, the buyer makes an invoice payment to the supplier according to the payment terms outlined in the purchase order. This step ensures that the supplier is compensated for their products or services and that the transaction is completed in a timely manner. Prompt payment can help maintain positive supplier relationships and may provide opportunities for future discounts or favourable terms.

How to Manage Purchase Orders

Effective management of purchase orders is crucial for maintaining efficient procurement processes and strong supplier relationships. Here are some strategies to help businesses manage purchase orders effectively:

Utilise Technology

Implementing purchase order software can automate many aspects of the purchasing process, reducing errors and saving time. These tools can help track purchase orders, manage approvals, and maintain accurate records. By leveraging technology, businesses can streamline their procurement activities and improve overall efficiency. Automation can also provide valuable insights into purchasing trends and help identify areas for improvement.

Standardise Processes

Establishing standardised procedures for creating, reviewing, and approving purchase orders can improve consistency and efficiency. Clearly defined processes ensure that all team members understand their roles and responsibilities. By maintaining a consistent approach to procurement, businesses can reduce the risk of errors and improve the overall effectiveness of their purchasing activities. Standardisation can also facilitate training and onboarding for new team members.

Monitor Supplier Performance 

Regularly evaluate supplier performance to ensure they meet delivery schedules and quality standards. Maintaining open communication with suppliers can help address issues promptly and strengthen relationships. By monitoring supplier performance, businesses can ensure that they are working with reliable partners who can meet their needs effectively. Performance evaluations can also provide valuable feedback to suppliers, encouraging continuous improvement.

Maintain Accurate Records

Keeping detailed records of all purchase orders, invoices, and communications with suppliers is essential for financial reporting and auditing purposes. Accurate records also facilitate the quick resolution of any disputes or discrepancies. By maintaining comprehensive records, businesses can ensure that they have the information they need to make informed decisions and address any issues that may arise. Proper record-keeping can also support strategic planning and forecasting efforts.

Review and Update Policies

Periodically review procurement policies and procedures to ensure they align with current business needs and industry best practices. Updating policies can help address changing market conditions and improve overall efficiency. By staying current with industry trends and best practices, businesses can ensure that their procurement activities remain effective and aligned with their strategic goals. Regular policy reviews can also help identify opportunities for cost savings and process improvements.

Streamline Invoice Payments and Stay on Schedule with Aspire

As mentioned above, invoice payments are the final step in the purchase order process. However, managing this manually can be time-consuming, as it often requires reviewing and approving each invoice individually. This outdated approach may result in delayed payments, potentially straining relationships with your suppliers.

This is where Aspire’s Business Account comes in. With its Payables Management feature, you can upload thousands of invoices, customise multi-level approval workflows, and automate payments—all in one place. You can also optimise cash flow by scheduling bulk payments based on invoice due dates, saving hours of manual work.

Even better, all accounts payable data can be synchronised with your accounting software, helping you close your books twice as fast.

Sign up for an Aspire account today to embrace automation and innovation while staying fully compliant.