The purchase order, often referred to as a PO, is a powerful tool for controlling business expenses and improving financial transparency.
There’s a lot to learn about the basics of using purchase orders. But don’t worry — we’ve compiled a complete guide to give you a 360-degree understanding of this topic.
In this article, you'll learn what a purchase order is, the information it should contain, its benefits, and how to implement a purchase order system step-by-step in your company.
Image: Example of purchase order process (source: Pexels)
What is a Purchase Order?
A purchase order is a commercial document sent by a buyer to a supplier to authorize a purchase. It's sometimes described as an "invoice in reverse" because it formalizes the buyer’s intent to purchase specific goods or services.
Purchase orders typically include:
- Product or service details
- Quantities
- Delivery dates
- Payment terms
While not always considered contracts, they serve as a formal record of the buyer's commitment to pay and help minimize miscommunication.
Key Functions of a Purchase Order:
- Inventory Management: Helps track incoming goods or materials.
- Financial Control: Prevents unauthorized spending.
- Supplier Communication: Acts as a green light for the supplier to fulfill the order.
How Does a Purchase Order Work in a Company?
The standard information included in a purchase order includes:
- Buyer’s company name
- Supplier’s details (e.g. tax ID/CNPJ)
- Date of order
- Description and quantity of items or services
- Agreed pricing
- Payment terms (e.g., net 30)
- Delivery address
- Unique PO number
Many companies require suppliers to be pre-registered in the system. This may include submitting bank details or undergoing a credit check.
How to Create a Purchase Order
Creating a PO is straightforward. You can use a template or software to fill in the required information and send it via email or an internal system. Here's what to focus on:
1. Clear Expectations
A PO clearly defines product specifications, quantities, delivery expectations, and pricing. This minimizes misunderstandings and creates a formal trail if things go wrong.
2. Purchasing Management
POs streamline the work of purchasing and finance teams, allowing better tracking of what was ordered, from whom, and at what cost.
3. Financial Tracking
Each purchase is documented and tied to a PO number, making budgeting and invoice reconciliation much easier.
4. Legal Protection
In disputes or audits, purchase orders serve as evidence that both parties agreed on terms. They complement contracts and support compliance.
Limitations of Purchase Orders
Not all business expenses can be processed through purchase orders. For example:
- Recurring bills: Utilities like electricity or rent.
- Subscriptions: SaaS or magazine subscriptions billed monthly or annually.
- Variable cost services: Legal or marketing services that don’t have fixed prices upfront.
- Internal expenses: Employee reimbursements or travel expenses.
How to Implement a Purchase Order System
1. Define a Purchasing Policy
Establish guidelines for how purchases should be requested, approved, and processed. This includes:
- Supplier selection process
- Minimum spend thresholds for POs
- Ethical considerations
- Negotiation protocols
2. Assign Roles and Responsibilities
A structured PO system requires role delegation. Common roles include:
- Administrator: Manages system settings and permissions.
- Approver: Authorized to approve purchases.
- Finance: Reconciles invoices with POs.
- Requester: Employees who create purchase requests.
3. Customize the PO Template
Most systems come with default PO templates. Add custom fields if needed, such as supplier ID, product codes, or internal budget references.
Remember: In many businesses, only pre-approved vendors can be issued POs, which adds a layer of compliance and risk control.