Purchase orders are one part of a business’s procurement process, which involves the purchasing of goods and services. Most businesses have to order supplies and track inventory, and purchase orders are essential for managing the purchasing process.
In a single purchase cycle, many companies will process as many as seven documents: purchase orders, purchase requisitions, quotes, order acknowledgements, goods received notes, packing slips, invoices, and bills. Tracking all of these documents can be complicated, which is why using efficient purchase order systems or automating the procurement process to ensure clear and organized record keeping is essential.
What is a purchase order?
A purchase order is one part of a business’s procurement process, which involves purchasing goods and services. Most businesses need to order supplies and track inventory, and POs are essential for managing the purchasing process. In short, if you’re wondering “what is a purchase order,” it’s an official document created by a buyer and sent to a seller that lists the agreed items, quantities, prices, and terms for delivery later. Once accepted by the vendor, the purchase order becomes legally binding.
What does PO stand for and what is its purpose?
PO stands for purchase order. The purpose is to formalize buying before money changes hands, create a clear audit trail, control spend through approvals, and enable tracking and matching against invoices and receipts. If you need a quick purchase order example: a pet store issues a PO for 80 bags of dog food at $15 each, totaling $1,200, to be delivered next week; the vendor accepts, then ships and invoices against that PO.
Purchase order vs invoice: What is the difference?
They're both involved in the process of purchasing goods from a vendor, though they're used at different stages of the transaction.
A purchase order is sent before any transaction has taken place. A purchase order is what’s created by a buyer, letting a seller know exactly what is being ordered. An invoice is what’s created by the seller, containing specific payment terms for what’s owed by the buyer after the goods or services requested in the PO have been rendered.
In other cases, an invoice with a balance of zero is sent to serve as an official record that payment has already been processed before the date of the invoice. Invoices will sometimes interact with purchase orders directly. When a purchase order is sent and processed before a transaction, the number of that purchase order will often be referenced directly by the invoice. This helps connect invoices to purchase orders and makes transactions as clear as possible for both accounts payable and accounts receivable departments for the two businesses in question.
How do vendors submit invoices against a purchase order?
Vendors generate an invoice that references the buyer’s PO number, item lines, quantities, prices, and payment terms. They submit it via the buyer’s preferred channel: email, supplier portal, EDI, or integrated AP automation. Clear reference to the purchase order ensures smooth two-way or three-way matching. Many systems allow electronic submission so the invoice automatically attaches to the corresponding PO record.
How do purchase orders get approved for payment?
Approval generally follows these steps:
Step 1: Requisition and PO creation
After internal approval to buy, the purchasing team creates a purchase order with a unique PO number.
Step 2: Vendor acceptance
The seller reviews and accepts the PO, making it a binding agreement.
Step 3: Receipt of goods/services
The buyer records receipt (e.g., goods received note) against the PO.
Step 4: PO matching
Accounts payable performs two-way (PO-to-invoice) or three-way (PO-to-receipt-to-invoice) matching to confirm items, quantities, and prices align.
Step 5: Issue resolution
Any discrepancies (over/short shipments, price variances) are resolved with the vendor or via change orders.
Step 6: Approval routing
The matched invoice is routed to designated approvers based on policy (amount, department, vendor).
Step 7: Payment scheduling
Once approved, the invoice is queued for payment per the terms stated on the purchase order and invoice.
How does a PO get paid?
After successful matching and approvals, AP schedules payment according to the agreed terms (e.g., Net 30, early-pay discounts). Payment methods can include ACH, wire, check, or virtual card. The PO remains open until fully invoiced and received; once satisfied, the buyer closes the purchase order. If partially fulfilled, the PO stays open and additional invoices can be submitted against remaining lines.
Advantages of purchase orders (POs)
If your company is not already relying on purchase orders in your business, now's the best time to start. Purchase orders offer the following benefits:
POs let you buy now, pay later
One of the reasons companies love using purchase orders is that they can place orders without paying immediately. Because the final price is contractually secure, this can help a company better plan its purchases around its overall cash flow.
For the seller, this also provides the chance to extend credit to a buyer since they are contractually guaranteed to receive full payment once the goods are delivered.
POs create a paper trail
You’re creating a documented record of each sale by using a purchase order. This record can be helpful in two specific situations. First, it can help if you and your supplier ever disagree over the terms of a sale.
For example, suppose that you order three dozen widgets but only receive two dozen. In that case, your original order serves as a legally binding document holding the vendor responsible for their end of the sale.
Second, a purchase order can be helpful during a financial audit. Having a record of your purchases can clarify your business expenses rather than relying on separate receipts and invoices.
POs help you track your shipments
Each purchase order will have its distinct purchase order (PO) number. The PO number makes it easier to track your shipment, and it can also remind you of your method of payment.
Suppose the supplier agrees to a particular delivery date. In that case, you'll also have confidence that your shipment will arrive when you need it, which can be vital if you need to make arrangements for unloading, warehousing, etc.
POs save time for you and your supplier
Most of today's major vendors are accustomed to receiving incoming orders through a standard purchase order. Relying on an established process can eliminate the back-and-forth between you and a vendor and ensure a smooth purchasing process for both parties.
POs help control and manage budget spend
Purchase orders allow for greater visibility into spending, which is an important part of managing budgets. When you know exactly where company funds are going, it’s easier to decide whether your budgets are accurate or need a refresh. In addition, it’s harder to go over budget when you know exactly where the money is spent.
What are the different types of purchase orders?
There are four different types of POs:
Standard purchase order (SPO)
If you’re making an order from a vendor you don’t usually work with, or making a one-time order you don’t expect to make regularly, you probably want to use a standard PO. These purchase orders require more information than some other POs, and can include details such as terms and conditions, an itemized list of deliverables, and specifications about delivery.
Planned purchase order (PPO)
Like a standard PO, a planned purchase order includes a lot of detailed information, but it will not include a delivery date or location. These details will be added when the desired items are needed, so the purchase order can be sent exactly when your business needs to restock or make a planned purchase at irregular intervals. This is useful for something you know your business will need eventually, but you aren’t sure about the exact date.
Blanket purchase order (BPO) or a standing order
What if you know you’ll want to purchase something in the future, but you don’t know when you’ll need it, and you don’t know how much you’ll need? Setting up a blanket purchase order (also known as a standing order) with your preferred vendor can make sure you’re ready to go when the time comes.
Blanket purchase orders can also be used for recurring purchases, with multiple purchase orders included for dates in the future.
Contract purchase order (CPO)
A contract purchase order only includes the agreed upon terms and conditions that vendors and businesses have established. It is essentially a contract to create guidelines for future POs. A PO can be placed under an existing CPO, and it must meet all of the negotiated terms of the CPO, such as the contract pricing. There is no need to include details about quantities or time frames in a CPO.
Example of a purchase order
Let’s walk through a PO example. If a pet store needs to purchase 80 bags of dog food, and they have agreed with the seller that they will pay $15 per bag, that equals $1,200 for their PO total.
The responsible parties at the pet store will create a purchases order, send it to the seller/supplier for approval, receive the seller’s invoice, and finally they will complete the PO matching process. This entire process could happen in one day or over the course of several days.
Purchase order definition and quick recap
To reiterate what is a purchase order: it’s a buyer-issued document that specifies what to purchase, at what price, and under which terms, before the invoice is sent. A solid purchase order system standardizes approvals, ensures budget control, and simplifies reconciliation. For another simple purchase order example, a marketing team issues a PO for 3 months of ad services at a fixed monthly rate; the vendor invoices monthly referencing the same PO until the total is fulfilled.
How to improve the PO process with BILL
Want to make a purchase order management process simpler? Automate it. Paper-based systems for managing purchase orders and invoices are not only outdated, but they’re time-consuming and introduce more opportunities for errors.
Using purchase order or billing management software helps digitize an entire process for purchasing and other documents, tracking them in a single system that can also integrate fully with an existing accounting or finance platform. If you want to fully digitize past records, that can be completed simply too, through a straightforward process for uploading documents.
Frequently asked questions
Why do you need a purchase order?
Purchase orders are sometimes viewed as cumbersome and unnecessary, especially for new or small businesses. But as a company’s needs become more complex, purchase orders become essential. POs provide specificity and legal protections that are hard to create with unofficial processes.
Businesses can use the purchase order to allocate funds and provide approval for each transaction, streamlining internal processes. Establishing a set, organized purchasing process that involves detailed and organized purchase orders is essential for long-term financial health and visibility in the accounting process.
Is a purchase order a contract?
A purchase order will indicate the items or services a buyer wishes to obtain from a vendor, and once the seller approves your purchase order, it becomes a legally binding document. These legal documents bind both the buyer and seller to the terms specified in the document itself, which means that it's important to confirm as many details as possible ahead of time to avoid confusion (or legal challenges) down the line
Can purchase orders be submitted electronically?
Most modern business processes are no longer paper-based, and the PO process is no different. Buyers can submit electronic purchase orders, and these digital systems often integrate with a company's accounting software to keep the entire operation streamlined and efficient.
The same is valid for invoicing, of course, and today's digital platforms allow companies to send invoices and accept payments faster than ever before.
What is the different between purchase order vs. purchase requisition
A purchase requisition is a form filled out by an employee within your organization to request the purchase of goods or services required on behalf of the organization.
A purchase order is an external-facing document, sent to vendors or outside parties as part of the process of purchasing the requested and approved good or service.
Think of the purchase requisition as a purchase order request: the employee is submitting a request to the procurement department to create a purchase order for the goods or services listed.
Once the purchase requisition or purchase order request is approved, the purchase order is created and submitted to the vendor.
Purchase order vs sales order
A purchase order bears a lot in common with a sales order, though the two forms are used for slightly different purposes.
A purchase order is sent from the buyer to the seller to indicate what goods or services are being ordered. A sales order is sent from the seller to the buyer to confirm the order details and approve the sale.
When do I pay the vendor?
Buyers are expected to pay the supplier according to the payment terms set out in the order itself. Generally, this means that buyers will pay the vendor after receiving an invoice for the purchased goods, though sometimes the seller may specify a payment deadline. Some sellers may request payment upon delivery, so make sure to check the terms before the date of delivery.
Pay attention to this deadline, as some vendors attach late fees and other penalties for payments received after the due date. If you clarified this deadline on your order form, you are legally bound to its terms
