What is Purchase Order and How Does it Work

Surya SK
December 24, 2021

Table of Contents

What is Purchase Order and How Does it Work [+Purchase order template & Format]

Let's start off by taking a look at how to handle your suppliers.

You require a particular product or service in order to run your small business, so you contact your suppliers and inform them of your requirements. They are the ones who supply it. You're the one who pays for it. The story has come to an end.

Isn't it too simple? It certainly is. Yes, the process of acquiring products can be more difficult than the preceding statement suggests. Payment issues, supplier shortages, misunderstanding that results in inaccurate shipments, and schedule delays are all possible.

Obtaining services from reputable vendors in a seamless and timely manner, on the other hand, does not have to be too good to be true — it is attainable, and purchase orders can help.

What is a Purchase Order?

A purchase order is a contract between a buyer and a seller that specifies details such as the goods or services to be provided, the delivery date, and any other terms and conditions, such as the price. 'PO' stands for purchase order. Both the supplier and the consumer benefit from purchase orders. Small firms can specify what goods and services they require from their suppliers, as well as when they require it, by issuing purchase orders.

This improves the efficiency and organisation of business processes. It also allows the vendor to confirm that the goods and services requested are available before committing to fulfilment, allowing the buyer time to plan accordingly. Purchase orders can also assist the buyer and seller in keeping precise, complete records for audits and financial reporting.

Purchase Order Procedure

The purchase order procedure begins with order approval, which is carried out by the approver in response to a request made by the department in need of raw materials. Following approval, the PO is returned to the requisitioner, i.e., the appropriate department, and then to the supplier for acceptance. When the vendor accepts the purchase order, it becomes a legally binding document that lays out the required items, the agreed-upon price, delivery expectations, and payment terms.

The journey described above is a complete cycle that can be observed in larger corporations and well-organized businesses. Because the business's procurement process does not need it, it is also possible to just raise a buy order without obtaining approval.

Types of Purchase Orders

It's crucial to remember that not all purchase orders are made equal. "If you've seen one purchase order, you've seen them all," you might think, but that isn't the case. There are five different sorts of purchase orders, each with a different amount of information.

  • Standard Purchase Orders
  • Planned Purchase Orders
  • Blanket Purchase Orders
  • Contract Purchase Orders
  • Digital Purchase Orders
Types of Purchase Orders

1. Standard Purchase Orders

The most well-known and extensively used buy orders are standard purchase orders. In this case, the buyer understands the purchase's details and can identify the item or service being purchased, as well as the amount, delivery schedule, and payment terms.


A corporation running low on printer cartridges, for example, might submit a regular buy order because they know exactly how much they need and when they need it. This is an example of a purchase order.

Depending on your requirements, standard purchase orders can be created for a variety of purposes. The above template, for instance, might be tweaked to fit:

  • To provide services
  • Subcontracting
  • Consignment

2. Planned Purchase Orders

By putting a purchase order in advance, a buyer is predicting their company's future needs for the item in question. The item, price, and payment terms are all known in this situation, but the quantity is an educated guess, and the delivery date is speculative.


Here's an example of a purchase order. If the same company that is running low on printer cartridges files a scheduled purchase order, the buyer in control would estimate how many printer cartridges they require with a more flexible delivery schedule. 

3. Blanket Purchase Orders

A buyer uses a blanket purchase order to submit many orders at once and negotiate lower prices.


If a company can get a better bargain by agreeing to place many purchases of printer cartridges and paper from a single supplier, for example, it can consider using a blanket purchase order to get these things. Here's how a purchase order may appear in this circumstance.

4. Contract Purchase Orders

The most official variation is a contract purchase order. Before issuing a purchase order that references the contract, the buyer and seller sign a contract stating the parameters of the transaction. For individuals participating, this sort of purchase order provides the most legal protection.


In the case of printer supplies, a contract purchase order arrangement might exist if a corporation forms a contract with their supplier describing the goods, quantity, pricing, and delivery schedule, and then follows up with a conventional purchase order. This is an example of a purchase order.

5. Digital Purchase Orders

Having a standard purchase order process in place can speed up the procurement process and benefit both buyers and suppliers.


Microsoft Excel or OpenOffice are two easy ways to make and share a digital purchase order. When you open a new spreadsheet, go to More Templates and type in "invoice" to get pre-existing templates.

Although we differentiated between invoices and purchase orders earlier, both may be found in Excel using this keyword. You can also customize the template to incorporate the items you require.

Let's speak about the importance of a buy order system now that we've gone over the various sorts of purchase orders.

Purchase Order Vs Invoice

The objective or goal is the most significant distinction between the two texts. 

When you place a buy order, you're asking your vendors to deliver the goods to you. When you send out an invoice, you're asking your consumers to pay you. Hence: The objective of a PO is to ensure that orders are fulfilled. 

An invoice is used to collect payment for goods or services that have been sold. 

Another distinction is in the order of events: 

A buy order is typically delivered at the start of a transaction to create a binding contract between the parties. 

Invoices, on the other hand, are sent at the conclusion of the transaction and seek payment using the information from the purchase order. 

Finally, unlike an invoice, a purchase order provides the following information: 

POs contain a thorough explanation of the order, the agreed-upon price, and the delivery date. 

An invoice, on the other hand, specifies the payment terms, applicable discounts, and the total amount payable.

How does the Purchase Order System Work?

How does the Purchase Order System Work?

Business does not cease when a purchase order is fulfilled; supply chain management is a continuous process that must be tracked. Having a purchase order system makes the process go more smoothly in this case.

A purchase order system is software that generates, tracks, and manages digital purchase orders via a secure network. Important agreements can be lost in transition if there is no framework in place, causing friction between buyers and sellers who are reliant on each other.

Here are some fundamental rules to follow when developing a purchase order system from scratch:

1. Figure out which forms are appropriate for you.

Return to the types of purchase orders page and select the format that best suits your company.

2. Create a pipeline with clearly defined process phases.

You must specify the procedures required to complete a purchase order from beginning to end in order to automate the process. Make a step-by-step workflow that shows interactions and where document data is entered and sent during the transaction.

3. Assign roles and make sure everyone knows where they need to go.

In order to complete the workflow in your company, you'll need team members that understand how to allocate roles properly. This same team will have to quickly assign access permissions to the various stakeholders so that they can contribute to the order on time.

4. Establish a purchase order system, stick to it, and enhance it.

You'll need to aggressively collect input from stakeholders as well as your internal team as you use and adhere to your PO system. Determine which processes in your workflow should be enhanced and make the necessary adjustments.

How to Write a Purchase Order?

A purchase order contains crucial information about the products or services that have been ordered.

Purchase Order Format

While there is no hard and fast rule for how a purchase order should be formatted, the following format can be used as a basic guideline:

  • Header: This is where you provide your company's details, such as its name, address, buy order date, and purchase order numbers.
  • Information about the supplier: This is where you specify who should receive the purchase order, as well as your individual contact name and the vendor's address.
  • Ship to: Next, indicate where the order should be sent, as well as the shipping method, terms, and expected delivery date.
  • The Order Details: Provide a line item with the product code or SKU, item name, and description for each product in the order. Include the desired amount of items, the price per unit, and the delivery date for each unit.
  • Summarize: A subtotal, any applicable vendor discounts, shipping costs, taxes, and finally, the purchase order form should be filled.

You will almost certainly need to purchase items or services from another company at some time throughout your small business operations. Whether you're making a lot of tiny purchases or a few big ones, you'll need a way to keep track of them. A buy order system streamlines your purchasing process by allowing you to produce and execute orders – from purchase request through vendor payment.

You will almost certainly need to purchase items or services from another company at some time throughout your small business operations. Whether you're making a lot of tiny purchases or a few big ones, you'll need a way to keep track of them. A buy order system streamlines your purchasing process by allowing you to produce and execute orders – from purchase request through vendor payment.

Purchase Order Template

Many firms use purchase order templates to keep track of their orders and avoid the headaches and costs that come with employing PO software. Standardizing the ordering process, ensuring proper record-keeping, and saving time can all be accomplished by using customised templates. 

A purchase order template is nothing more than a set of instructions or a pattern that many purchasers use when creating a PO. Because the template includes fields for buyers to fill in all of the relevant information on the PO, representing the necessary information is not taxation in and of itself. A well-structured purchase order helps to streamline the purchasing process by eliminating ambiguity in suppliers' thoughts.

Templates can be created using specialist tools like Microsoft Word and Excel, as well as purchasing software like Bellwether, Order MS, and Sage Intacct. A purchase order template should typically include the following elements:

  1. Name of the Company
  2. Address of the Company
  3. PO number
  4. Purchase order date
  5. Vendor name and billing address
  6. Buyer name and shipping address
  7. Contact details, such as phone numbers and email addresses
  8. Delivery date
  9. Shipping method
  10. Shipping terms
  11. Item name
  12. Item description and technical information
  13. Item quantity
  14. Item unit cost
  15. Line total
  16. Taxes
  17. Total price
  18. Payment terms


Last but not the least,, you need to have a proper purchase order system to facilitate a smooth workflow. The PO should have everything that's required to ensure seamless operations and productivity. For this purpose, you can even take feedback from your team and stakeholders. This can go a long way in building a well-managed PO system and supply chain.