What Is a Purchase Order?

Purchase orders help buyers optimize procurement budgets and inventory management. They act as an agreement that helps businesses when buyers refuse to pay for purchased goods or services.

But, what is a purchase order, and how does it work?

Let’s explore everything you need to know about purchase orders to understand their role in the B2B buying process.

Purchase Order Meaning

A purchase order (PO) is a document issued by buyers to sellers outlining the conditions of purchase, including the products, quantities, payment terms, and delivery information. The purchase order becomes an agreement between the two parties when accepted by the seller.

Purchase orders help buyers procure goods and services without worrying about last-minute changes in prices or supply terms. Similarly, they allow sellers to supply goods without risking non-payment.

Purchase orders are identified using a unique number provided by the buyer called the purchase order number. This number creates an audit trail that allows both parties to track the order processing, delivery, and payment.

Besides learning what a purchase order is, it’s also important to understand the different types of POs in the market.

The type of purchase order companies use can vary by industry and business need. The most commonly used types of purchase orders are:

1. Standard Purchase Order: For one-off, single purchases.

2. Blanket Purchase Order: For recurring purchases from a specific vendor for unknown quantities.

3. Planned Purchase Order: For individual ongoing purchases from different vendors.

4. Contract Purchase Order: For frequent purchases of products on predefined payment and delivery terms from a vendor, such as monthly subscriptions.

Purchase Order Workflow Across the Customer-Buying Process

Here’s an overview of how purchase orders are created and fulfilled during the customer buying process.

Need recognition.

The first step in the procurement process starts with buyers realizing they have a problem. For instance, customers realize their computer is slow, or the printer is malfunctioning.

Buyers haven’t considered what purchase order type is suitable for their needs yet. They’ve only identified a need.

Information gathering.

Next, they begin searching for possible solutions, online and offline. After identifying potential solutions, buyers create an internal purchase requisition for the purchase.

Solution evaluation.

When the purchase is approved, buyers reach out to different suppliers requesting quotes for the supply of goods or services. They may also negotiate with suppliers on the product pricing, payment, or supply terms during this stage.

To ensure their organization chooses the best supplier to fulfill their purchase, customers compare prices and quotes to identify the best option before drafting the purchase order.

Purchase phase.

After shortlisting a vendor, the process of drafting a purchase order begins.

So, what is a purchase order like at this stage? It’s an internal document that outlines the purchase details based on the finalized quote and lists all agreed terms of payment and delivery.

Then, it’s sent to the purchasing department for approval. Once approved, it becomes a formal purchase order and is sent to the seller.

Upon receiving the PO, the seller confirms the order and proceeds with fulfillment.

Post-Purchase approval and closure.

The seller then ships the order with the PO number referenced on all shipping documentation and issues an invoice to the buyer’s accounts payable department.

When buyers receive their order, they inspect the goods and approve the invoice. Post-approval, the accounts department matches the invoice number and PO and processes payment based on the agreed-upon payment terms to complete the purchase order process.

Purchase Order Details

To understand what a purchase order is, you should also familiarize yourself with the information it contains.

Here’s all the information you’ll find on a purchase order:

Purchase order number.

The PO number is the most important detail listed on the purchase order form. It helps buyers and sellers track the order status in their purchase order systems.

Buyer information.

Purchase orders contain buyer information such as the name or department issuing the purchase order, shipping address, contact details and billing address.

Seller information.

Purchase orders also specify vendor information such as the company name, address, contact information and, in some cases, internal vendor number.

Order details.

The PO includes a detailed description of the order, such as the item details or model number, product SKU, quantity of items, unit prices, total price and applicable taxes or discounts.

Delivery information.

Purchase orders also specify the delivery details such as the address, contact and estimated delivery date. Some purchase orders might also include shipping costs and special delivery instructions for the order.

Payment details.

POs contain payment details such as the due date, price, payment terms (Net 15, Net 30, or monthly installments) and preferred payment methods such as credit card or bank transfer.

Post-Purchase PO Process

When sellers receive a purchase order, they usually send a confirmation email to convey the acceptance of the terms listed in the official document.

The seller then processes the order and dispatches it along with a packing slip containing the purchase order number. Including the PO number on the packing slip ensures the order is received by the correct department at the buyer’s address.

Once the buyer receives the order, they review it and approve the purchase. The invoice is then paid out based on the purchase order terms. In some cases, sellers might also send out customer satisfaction surveys after the order is complete to identify areas of improvement.

The Final Word

Whether you’re a B2B or B2C business, you’ll likely need to accept or issue a purchase order when dealing with suppliers and vendors. Learning what a purchase order is can help you simplify procurements for your startup or small business.

Businesses use purchase orders to streamline B2B purchases. Purchase orders allow customers to buy products without paying in advance and provide sellers protection from fraudulent purchase transactions.