Purchase Order: What It Is & How to Create One [+ Template] (2023)

Purchase orders are a staple in a business’ financial documentation — not only for the purposes of expense tracking and budgeting, but also for keeping supplier management on track.

Purchase Order: What It Is & How to Create One [+ Template] (1)

As the buyer, you’d benefit from creating POs to prevent miscommunications with suppliers and prevent unexpected costs.

To help you create your own purchase orders, this article will cover:

  • What is a purchase order?
  • How does a purchase order work?
  • Format for Purchase Order Form Template
  • Types of Purchase Orders
  • Purchase Order System

What is a purchase order?

A purchase order, or PO, is a legal document a buyer sends to a supplier or vendor to authorize a purchase. Purchase orders outline what the buyer would like to purchase and how much of it they would like to receive. These agreements help both the buyer and seller document transactions.

Let’s talk about supplier management. You need a specific product or service to run your small business, so you reach out to your suppliers and tell them what you need. They provide it. You pay them for it. End of story.

Sounds too easy? It is. Yes, the process of procuring goods can be more complicated than the description above. There can be payment issues, supply shortages, miscommunication that leads to incorrect shipments, and scheduling delays.

However, obtaining services from trusted vendors in a smooth, timely fashion doesn't have to be too good to be true — it is possible, and using purchase orders can help.

Purchase orders are beneficial for both the buyer and seller. By issuing purchase orders, small businesses can specify what goods and services are needed from their suppliers and when it’s needed by.

This keeps business operations efficient and organized. It also allows the seller to ensure it can provide the goods and services requested before committing to fulfillment, giving the buyer time to plan accordingly.

Additionally, purchase orders can help the buyer and seller maintain accurate, detailed records for auditing and financial statements.

How does a purchase order work?

Now that we're clear on what a purchase order is, let's walk through the process of creating one.

(Video) Example Purchase Order template created in Excel

1. Buyer decides to order items from the seller.

Before an order can be placed, the buyer must identify a need that the seller's product or service can fulfill. During this step, the buyer should identify what product or service is needed, the quantity needed (if possible), and when it’s needed by (again, if possible).

For example, if you need to order new boxes to ship your product orders, calculate how many boxes you need and when you need them by.

Say you’re anticipating a holiday rush coming up, you might look at last year's box order and multiply it by your estimated growth this holiday season to order the right amount.

2. Buyer drafts the purchase order and sends it to the seller for approval.

With the information above, the buyer should draft the purchase order and send it to their seller for approval. When sending the purchase order to a seller, indicate when approval is needed to keep the process timely.

Ideally, the response should come in ample time to receive the product or service on schedule or should give the buyer enough time to source from another seller if needed.

Continuing the example above, once you have identified a vendor that can provide your boxes, as well as how many boxes you need and when you'll need them, you can draft your purchase order using this information. Send it to your sales rep or point of contact.

3. Seller reviews the purchase order and confirms if it can fulfill the request.

Once the seller receives the purchase order, it's up to them to review the request and check inventory or availability to confirm if it can be fulfilled by the date needed.

In the case of the box shipment, the vendor has reviewed your order and after reviewing their inventory and shipping capacity, it determines if it is able to fulfill your request.

4. Purchase order is approved.

If the seller can fulfill the request as instructed by the buyer, it'll approve the purchase order making it legally binding for both parties.

Since the box company is able to fulfill your request, it sent an approved copy of the purchase order back to you to confirm.

5. Product or service fulfillment.

After the purchase order has been approved, the seller is responsible for providing the product or service as agreed upon. During this stage, it can also generate and send an invoice to the buyer for the amount indicated on the purchase order. The invoice should recap what goods were provided, relevant quantity, and amount owed.

For example, after approving the shipment of boxes, you should receive the fulfilled order and an invoice for the amount owed. This vendor has net 30 payment terms, and will be expecting payment within 30 days of issuing the invoice.

6. The invoice is paid.

During this final stage, the buyer is responsible for paying the invoice per the payment terms indicated by the seller. It's now up to you, the buyer, to submit payment for the invoice according to agreed-upon payment terms.

Now for a quick clarification, purchase orders and invoices aren’t synonymous.

Purchase Order vs. Invoice

Purchase orders are sent by buyers to vendors to control and track the purchasing process, while invoices are official payment requests made by vendors to buyers when the order is fulfilled.

Purchase Order Format

Ready to create your own purchase order? Here is the information you need to include.

(Video) PURCHASE ORDER TEMPLATE - General Overview

1. Header: Provide your company details, including the company name, business address, purchase order date, and purchase order number.

2. Vendor information: Indicate the proper recipient for the purchase order. This is where you list the name of the seller company, your specific contact name, and the address of the seller company.

3. Ship to: Specify where the order should be sent, what the shipping method is, what the shipping terms are, and the intended delivery date.

4. Order details: For each product included in the order, provide a line item with the product code or SKU number, item name or description, quantity of units requested, the price per unit, and the delivery date of each item.

5. Summarize: Complete the purchase order by providing a subtotal, any applicable discounts, taxes, shipping costs, and grand total.

Sample Purchase Order Form

Here's an example purchase order template featuring each of the above-mentioned points.

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As you can see, you have the option of adding multiple products, so there’s no need to create different purchase orders per product. In addition, you can take discounts out of the final cost and take into account shipping and handling.

Interested in downloading this sample?

Purchase Order Template

To create your own purchase order following the above format, download our easy-to-use purchase order template.

This template comes in two versions: an Excel version and a fillable PDF. We recommend using the Excel version for creating multiple POs for a single supplier and the fillable PDF for one-off purchases. The Excel template will automatically calculate the final cost for you, making it easy and simple to see your totals and discounts.

Types of Purchase Orders

  1. Standard Purchase Orders
  2. Planned Purchase Orders
  3. Blanket Purchase Orders
  4. Contract Purchase Orders
  5. Digital Purchase Orders

It is important to note all purchase orders are not created equal. At this point, you might be thinking, "If you've seen one purchase order, you've seen 'em all," but that's just not true. There are actually five types of purchase orders, and they differ by how much information is included.

1. Standard Purchase Orders

Standard purchase orders are the most widely used and recognized. In this situation, the buyer is clear on the details of the purchase and can identify what item or service they're buying, the quantity, delivery schedule, and payment terms.

(Video) Quickbooks 2021 Tutorial for Beginners - How to Create a Purchase Order

For example, a company that is running low on printer cartridges may place a standard purchase order because they know exactly how much they need and know when they need to have it. Here's what that purchase order could look like.

Purchase Order: What It Is & How to Create One [+ Template] (5)

Standard purchase orders can be made for a number of different functions depending on your needs. For example, the above template could be adjusted for:

  • Services to be rendered
  • Subcontracting
  • Consignment

2. Planned Purchase Orders

When placing a planned purchase order, a buyer is estimating the future needs of their company for the item in question by submitting a purchase order in advance. In this case, details such as the item, price, and payment terms are known, but the quantity is based on an educated guess and the delivery date is tentative.

For example, if the same company that is running low on printer cartridges places a planned purchase order, the buyer in charge would estimate how many printer cartridges they need with a more flexible delivery schedule. Here's what that purchase order might look like.

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3. Blanket Purchase Orders

With a blanket purchase order, a buyer places multiple orders at one time to negotiate discounted pricing.

For example, if the same company can negotiate a better deal by agreeing to place multiple orders of printer cartridges and paper from a single supplier, it would consider using a blanket purchase order to acquire these items. In this scenario, here's what a purchase order could look like.

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4. Contract Purchase Orders

A contract purchase order is the most formal variation. In this case, the buyer and seller sign a contract outlining the terms of the purchase before a purchase order referencing the contract is issued. This type of purchase order offers the most legal protection for those involved.

Using the printer supplies example, if a company signs a contract with their supplier outlining the items, quantity, pricing, and delivery schedule and follows up with a standard purchase order, these companies would be under a contract purchase order agreement. Here's what that purchase order could look like.

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5. Digital Purchase Orders

Having a set process in place for purchase orders can help the procurement process move efficiently and be mutually beneficial for both buyers and sellers.

One easy way to create and share a digital purchase order is in Microsoft Excel or Open Office. You can find pre-existing templates when you open a new spreadsheet and click on More Templates and search “invoice.”

Purchase Order: What It Is & How to Create One [+ Template] (9)

We already made the distinction between invoices and purchase orders, but you can find both under this keyword in Excel. And of course, you can edit the template of your liking to include elements specific that you need.

(Video) Purchase Order Template - How To Fill Purchase Order

Lastly, now that we’ve gone through different types of purchase orders, let’s talk about the importance of a purchase order system.

Purchase Order System

Business doesn’t end after one purchase order is fulfilled, in supply chain management there will always be an ongoing process to track. This is where having a purchase order system eases the process.

A purchase order system is software that generates, tracks, and manages digital purchase orders in a streamlined and secure network. Without a system in place, important agreements can be lost in transition and cause friction between buyers and sellers dependent on one another.

To create a purchase order system from the ground up, here’s some general guidelines to adhere to:

1. Determine the right forms for you.

Refer back to the types of purchase orders list and choose the purchase order format suitable for your business.

2. Design a workflow with outlined steps of the process.

To automate the process, you need to outline the steps necessary to take a purchase order from beginning to end. Create a step-by-step workflow showcasing interactions as well as where document data is inputed and transferred during the transaction.

3. Dictate role assignments and accessibility.

In your business, you need team members who know how to correctly assign roles to direct the workflow to completion. This same team will need to efficiently set access permissions to the stakeholders at hand so they can contribute to the order in a timely manner.

4. Begin, adhere to, and improve your purchase order system.

As you use and adhere to your PO system, you’ll have to actively collect feedback from both stakeholders and your own internal team. Figure out where certain steps can be improved and change them in your workflow. With time you’ll have a productive system going forward, and a smoother supply chain to manage.

Purchase Order Example

Not sure what a purchase order should look like? The below PO example checks all the boxes — it includes the customer’s information, the desired products, the shipping terms, and the PO number. Plus, it includes a note for the vendor.

Purchase Order: What It Is & How to Create One [+ Template] (10)

Image Source

Some vendors might prefer to fill in their business information, so on the “Vendor” side of the header, you can leave the information blank for them to fill out.

Purchase Orders Lead to Stronger Relationships with Suppliers

Purchase orders benefit both you and your suppliers, ensuring there are no miscommunications throughout the purchase process. With the right template, purchase orders can be easy and simple to create, even if you don’t have a dedicated vendor relationship manager on your team.

Editor's note: This post was originally published in October 2019 and has been updated for comprehensiveness.

FAQs

What is a purchase order template? ›

A purchase order form (PO form) is needed whenever you want to purchase goods and services from a vendor. A purchase order form is used as an official record and contractual agreement of the business transaction between buyer and supplier, and outlines key information of the order.

What is a PO template? ›

The first step in automating the process is to create a purchase order template that contains all the details needed to approve and pay for the order when the time comes. The purchase order process: A PO is raised by a buyer. The purchase order is approved by the relevant people at the buyer's end.

How do you write a purchase order in short form? ›

A purchase order (PO) is legal document buyers send sellers to order goods. This document contains prices, quantity, payment terms, and delivery schedule information. It also includes the buyer's details.

What are the types of purchase order? ›

The four types of purchase orders are:

Standard Purchase Orders (PO) Planned Purchase Orders (PPO) Blanket Purchase Orders (BPO) (Also referred to as a “Standing Order”) Contract Purchase Orders (CPO)

How do I create a purchase order in Excel? ›

How to Create a Purchase Order Using Microsoft Excel. If you'd rather work with a spreadsheet, you can use the same technique to create a purchase order in Microsoft Excel. Open a new document in Excel then click the icon at the top left of the screen. Choose “new” and “Purchase Orders” from the list.

How does purchase order work? ›

A purchase order (PO) is an official document a buyer sends to a seller. The purchase order binds the buyer to a promise to pay the seller for designated products at a future date. The purchase order form itself specifies the types and quantities of each product. Purchase orders are beneficial to both parties involved.

What is a purchase order vs invoice? ›

The difference between a purchase order and an invoice is that a purchase order is issued by the buyer and is to be fulfilled by the vendor, where an invoice is issued by the vendor after fulfilling a purchase order and must be paid by the buyer.

How do you write a purchase order letter? ›

Guidelines to write an Order Letter
  1. The letter should be precise; no pep talk or informal conversation is required. ...
  2. The language should be simple and formal.
  3. Make no errors in the specs or numbers.
  4. Inform the seller when you expect delivery and how you intend to pay the fee.
  5. Jargon should be avoided.

What means PO number? ›

A purchase order number is a unique number assigned to a purchase order — an official confirmation of a buyer's intent to purchase from a vendor, covering the details of the transaction. A purchase order number helps both vendors and buyers track and reference the orders they've sent or received.

Why do we create a purchase order? ›

Purchase Orders (PO's)

They are an important tool for Buyers because they formalize requirements and pricing, and serve as legally binding documentation of the goods/services that were ordered.

How do I create a purchase order number? ›

PO numbers are decided by the buyer. If you're one of the small business owners with relatively few purchases to make, creating a unique PO number is straightforward. Just use a unique number assigned to identify each transaction. For example, 00001 for the first one followed by 00002, 00003, 00004, and so on.

What is the full form of purchase order? ›

The full form of the acronym PO is Purchase Order. It is a document prepared and sent by the buyer's purchasing department to the seller mentioning the description and quantity. Price agreed upon mutually for the goods or services intended to procure.

What is the key for purchase order? ›

1. Go to Gateway of Tally > Inventory Vouchers > Ctrl+F2 > F4 : Purc. Order to view the Order Voucher Creation screen.

What is purchase order entry? ›

A purchase order is a document buyers use to place an order with a seller, or supplier. POs detail essential buying data like contact information, the date, product information, and terms and conditions. Generally, purchase orders are legally binding documents after the seller accepts the agreement.

What are the 3 types of purchases? ›

Types of Purchases
  • Personal Purchases.
  • Mercantile Purchasing.
  • Industrial Purchasing.
  • Institutionalized or government purchasing.

What are the 8 types of purchases? ›

Methods of Purchasing Materials (8 Methods)
  • Purchasing by Requirement: ...
  • Market Purchasing: ...
  • Speculative Purchasing: ...
  • Purchasing for Specific Future Period: ...
  • Contract Purchasing: ...
  • Scheduled Purchasing: ...
  • Group Purchasing of Small Items: ...
  • Co-operative Purchasing:

What are the 4 goals of purchasing? ›

There are four major goals of purchasing: maintain the right supply of products and services, maintain the quality standards of the operation, minimize the amount of money the operation spends, and stay competitive with similar operations.

What is PO in invoice? ›

A PO number or purchase order number is a unique number given to a particular order placed before the seller, similar to the invoice number.

Can you invoice without a purchase order? ›

Just as it sounds, a non-PO invoice is when someone in your organization purchases an item or service without a purchase order. Having a PO for the invoice can save man-hours as it captures the quantity, quality, price, buyer details, and links it back to the supplier – and it can even contain the appropriate coding.

Do you need a PO number for invoice? ›

Expert's Answer: There is nothing to stop you invoicing as normal whether you have a PO number or not.

How do you ask a customer to order a sample? ›

Dear Sir/Madam, I want to remind you to please send the pending purchase order of (mention the order name/detail/product). So that we can start working accordingly. I will be thankful for your positive response asap.

What is a purchase letter? ›

A purchase letter of intent is a form that communicates an individual's intention to purchase products or services from a vendor. The customer will make use of this letter to demonstrate their seriousness as a buyer and their motivation to transact business in the future.

How do you write a letter? ›

How to write a letter
  1. Choose the right type of paper.
  2. Use the right formatting.
  3. Choose between block or indented form.
  4. Include addresses and the date.
  5. Include a salutation.
  6. Write the body of your letter.
  7. Include a complimentary close.
  8. List additional information.

How many numbers should a PO be? ›

For this reason, we recommend that purchase order numbers be between four and six characters. You should use a set naming convention for your purchase orders. For example, you could begin the purchase order number with the first letter of the wholesaler's name, such as S for S.P.

How do PO and invoices work? ›

A PO is generated when the customer places the order, while an invoice is generated after the order is complete. A PO details the contract of the sale, while an invoice confirms the sale. Buyers use POs to track accounts payable and sellers use invoices to track accounts receivable (in their accounting records).

WHO issues a purchase order number? ›

A Purchase Order is created and issued by the buyer (or client) of a product or service at the start of a transaction. It details the particulars of a sale, such as the products or services required, the amounts, and the agreed upon pricing.

Who prepares purchase order? ›

The buyer is responsible for creating and issuing a purchase order. In larger companies, a procurement or purchasing department will typically issue the purchase order. In smaller companies, the business owner, operations manager, or financial manager may issue the purchase order.

Can a PO number be any number? ›

Manual PO Number System

The code can be a mix of letters, numbers, dashes, arranged in any way that best makes sense to you as a business owner. For example, you can move up sequentially for every new purchase order issued. Start with 1, 2, 3, or even 00001, 00002, and so on.

What is open PO? ›

An open purchase order is one that references an item that your supplier has not yet fully billed or received. The report excludes closed, final closed, and cancelled orders.

What is P2P cycle? ›

"Procure to pay," or P2P, is the full cycle of actions and events that a business engages in when they require goods or services from an outside supplier. This cycle describes the steps that a company must take to procure the items and pay the appropriate remittance to the supplier, less any discounts and adjustments.

What is the flow of purchase order? ›

Purchase order vs purchase invoice
Purchase orderInvoice
Buyer initiates and sends to the supplierSupplier initiates and sends it to the buyer
It is issued before receiving the goodsIt is issued after or along with the delivery of goods by the supplier.
1 more row
10 Jun 2020

What is purchase return? ›

Purchase return definition

A purchase return is when a buyer (either a business or an individual) returns goods that they bought to the seller for a refund or store credit, depending on the seller's policy.

Is a purchase order the same as an invoice? ›

The difference between a purchase order and an invoice is that a purchase order is issued by the buyer and is to be fulfilled by the vendor, where an invoice is issued by the vendor after fulfilling a purchase order and must be paid by the buyer.

How does a purchase order work? ›

A purchase order (PO) is an official document a buyer sends to a seller. The purchase order binds the buyer to a promise to pay the seller for designated products at a future date. The purchase order form itself specifies the types and quantities of each product. Purchase orders are beneficial to both parties involved.

Who creates a purchase order? ›

The buyer should create the purchase order. The buyer, also known in the procurement process as the purchase requestor, will create a purchase order once the purchase request is approved. The buyer then sends the purchase order to the supplier (seller) so that they can accurately fulfill the purchase.

How important is the purchase order form? ›

Purchase order is a legally binding contract between you and the supplier that includes useful information in addition to order data, size and payment terms. The order is also the starting point of recording and contains all the important information needed for the job.

Which comes first PO or invoice? ›

A purchase order is usually sent at the beginning of the transaction to form a contract between parties. Invoices, on the other hand, are sent at the end of the transaction using the information from the purchase order to request payment.

What is the key for purchase order? ›

1. Go to Gateway of Tally > Inventory Vouchers > Ctrl+F2 > F4 : Purc. Order to view the Order Voucher Creation screen.

What is the PO number? ›

A purchase order number is a unique number assigned to a purchase order — an official confirmation of a buyer's intent to purchase from a vendor, covering the details of the transaction. A purchase order number helps both vendors and buyers track and reference the orders they've sent or received.

How is purchase order written? ›

Purchase orders are sent by the buyer to the vendor first, and they outline exactly what the order should contain and when it should arrive. It'll include things like quantity of items, detailed descriptions of the items, the price, date of purchase, and payment terms.

What is the purpose of a PO? ›

Purchase Orders (PO's)

They are an important tool for Buyers because they formalize requirements and pricing, and serve as legally binding documentation of the goods/services that were ordered.

What is PO in invoice? ›

A PO number or purchase order number is a unique number given to a particular order placed before the seller, similar to the invoice number.

What is P2P cycle? ›

"Procure to pay," or P2P, is the full cycle of actions and events that a business engages in when they require goods or services from an outside supplier. This cycle describes the steps that a company must take to procure the items and pay the appropriate remittance to the supplier, less any discounts and adjustments.

What is open PO? ›

An open purchase order is one that references an item that your supplier has not yet fully billed or received. The report excludes closed, final closed, and cancelled orders.

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