Purchase orders: What they are and how they work

Streamlining how your business purchases materials, supplies, inventory and services can help keep operations running smoothly and costs under control. This is where purchase orders (POs) come in. POs provide accountability for every transaction and can make it easier to manage your company’s spending.

This guide explains what a PO is, its key features, how it works and why it can be essential to your business’s growth and long-term success.

What you’ll learn:

• A PO is a legally binding document that details the items, costs, delivery and payment terms for purchases between your business and a supplier or vendor.

• There are several types of POs: standard, blanket, planned and contract. 

• Using POs offers businesses a range of benefits, such as streamlined operations, improved expense tracking and reduced errors—all while providing better financial control.

A purchase order, or PO is a legal document your company uses to place orders with suppliers or vendors. It basically serves as a formal record of what your business is ordering, who it’s ordering from and when payment is due. Each PO outlines the types of products or services being purchased, along with the quantities, prices, and payment and delivery terms.

POs help create structure and financial clarity in your buying processes. They can offer legal protection, streamline operations and help strengthen relationships with your suppliers and vendors. And as your company continues to grow, POs can help you scale your business, track larger orders and control your budget.

There are four types of POs, each serving a different purpose and business need: 

• Standard purchase order (SPO): An SPO is the most common type of PO. It’s used for one-time purchases when all order details are known—such as what’s needed, how much it costs and when it will be delivered. An SPO includes key information like item descriptions, quantities, prices, payment terms, and delivery dates and addresses.

• Blanket purchase order (BPO): A BPO is used for repeat purchases—like recurring deliveries of office supplies—over a set period of time. BPOs outline agreed-upon terms, pricing and maximum purchase quantities so you’re consistently getting what your business needs—without negotiating individual POs for every delivery.

• Planned purchase order (PPO): A PPO is similar to an SPO, as it outlines the items, quantities and prices for the products or services needed. However, the delivery dates are flexible and confirmed at a later time, often when a release order is issued. This type of PO helps your business plan purchases in advance and ensures funds are available when the products or services are needed.

• Contract purchase order (CPO): A CPO outlines the terms and conditions for a transaction, establishing that a future purchase may be needed. But it doesn’t include specifics like the item, quantity or delivery time frame. CPOs can help lock in terms with a supplier or vendor for future purchases, with the details finalized as needed.

You’ll find several different versions of POs, but most include the following standard components:

The PO number is a unique identifier that’s assigned to each PO, making it easier to track and reference in the future if needed. You can use it to match orders with invoices, receipts and payments—helping prevent duplicate or fraudulent transactions.

The names of the buyer and the seller, addresses and contact details should be clearly listed at the top of the PO. This information helps guarantee clear communication between both parties—and it’s vital to include in case any legal issues arise with the purchase.

The PO should also include detailed descriptions of the products or services being ordered, along with a complete list of what’s being purchased. The information in POs often includes:

• Product or service name

• Model number or stock-keeping unit (SKU)

• Descriptions and specifications

• Quantities

• Price per unit and total cost (including taxes and any discounts)

The PO should clearly state where, when and how the order will be delivered. This information typically includes details such as:

• Shipping address

• Expected delivery date

• Shipping method or carrier

• Shipping terms

Include the agreed-upon payment terms on the PO to specify how and when payment will be made, such as net 30 days. You can also note accepted payment methods, due dates and any discounts or applicable fees (like late charges). Clear payment terms help reduce confusion, set expectations for both parties and protect cash flow.

The PO process typically begins with a purchase requisition—a document designed to request and track the purchase of products, supplies or services while helping keep track of expenses. Once approved, a PO is created with all relevant details, including supplier information, item descriptions and quantities, delivery and shipping details, and pricing and payment terms. The PO number is also assigned at this time.

In most cases, the supplier or vendor then receives, reviews and accepts the PO, making it a legally binding contract. Next, your business receives the ordered product or service, along with an invoice from the supplier or vendor. Your accounting team performs a three-way match—comparing the PO and the goods received with the supplier or vendor’s invoice—before approving payment. If everything is correct, your company pays the supplier or vendor within the payment terms outlined in the PO. Once payment is complete, the PO is closed.

Here’s a quick overview of the steps involved in a typical PO process:

1. Purchase requisition created and approved

2. PO created

3. PO reviewed and accepted by supplier or vendor

4. Order fulfilled and delivered 

5. Order and invoice verified, and a three-way match performed

6. Payment sent to supplier or vendor

7. PO closed

Businesses of all sizes can benefit from using POs, which can improve financial control and internal communication, increase operational efficiency and enhance accountability. POs can benefit your organization by:

POs help your business track spending by serving as a formal record of what your company orders, the costs and when payment is due. They help you effectively manage cash flow and help ensure you’re not overspending or duplicating orders.

Since POs are legally binding contracts that outline the products and services to be delivered—along with the agreed-upon price, delivery timeline and other terms—they assist in preventing and resolving potential disputes over what was ordered and what was delivered. POs also help streamline operations, reducing the risk of errors that could lead to issues like overstocked inventory.

POs help your accounting department maintain accurate records by providing clear documentation for tax filing and financial reporting. They create a clear path from order to delivery to invoice to payment. You can also typically integrate POs with your current accounting software for seamless tracking.

POs offer structure and transparency to your business’s buying process. They help streamline operations, keeping your company organized and financially stable while building trust with vendors and suppliers. By using POs consistently, you can set your business up for sustainable growth and reduce the potential for miscommunication that might lead to costly errors.

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