Purchase Orders (POs): What Are They & How Do They Work?
3 Min. Read Time
Purchases orders (or POs for short) are an essential part of any supply chain. In this article, we break down what a PO is, how it works, and answer other frequently asked questions.
What is a purchase order?
A purchase order (PO) is a legally binding document created by a buyer and sent to a seller. It’s a list of what you want to buy that lays out product SKUs, quantities, payment terms, and delivery details.
It is both a form of insurance and a legal commitment by the buyer to the seller that they’ll purchase the goods or services for the agreed amount. Similarly, it’s a form of insurance for the buyer that the seller will invoice them for the agreed upon amount in any case where there might be a discrepancy.
How does a purchase order work?
Purchase orders are typically used by organizations purchasing in bulk. For example, if you run a warehouse, you may need to purchase several types of corrugated boxes in different quantities from your supplier. To buy them using a purchase order, the flow of events goes like this:
Create a purchase order.
You create a purchase order specifying exactly what you need from the supplier (see “What should a purchase order include?”).
Supplier accepts the purchase order and ships goods.
If your supplier has your items in stock, they’ll accept the purchase order and deliver the goods according to the delivery terms you’ve laid out.
Supplier sends a bill or invoice.
The supplier will then send a bill or invoice for the items according to the purchase terms laid out in the PO.
Payment processed.
You pay for the items and the sale is processed by your supplier.
What are different types of purchase orders?
Standing purchase order
: buyer can purchase agreed upon SKUs repeatedly using the same PO number.
Blanket purchase order
: buyer schedules multiple deliveries at a set price under the same PO, typically at a discount given in exchange for larger order volume.
What should a purchase order include?
Purchase order details vary depending on your organization and the type of item being purchased, but it typically includes:
Issue date
Product SKUs, quantities, and unit prices
Delivery date
PO number
Shipping and billing address
Company name and contact information
Payment terms
What is the difference between a purchase order and an invoice?
Purchase orders and invoices are often confused since they are both legally binding documents exchanged between buyers and sellers. However, they aren’t the same.
Purchase Orders are issued by buyers to place orders and created before delivery.
Issued by buyer before purchase
Specifies goods requested and proposed payment terms
Invoices are issued by sellers and created after delivery.
Issued by seller after delivery
Specifies final payment amount and due date
What is the difference between a purchase order and a purchase requisition?
Purchase orders and purchase requisitions are often confused, but they aren’t the same.
Purchase orders are legally binding documents created by a buyer and issued to a seller after receiving approval to place an order.
Purchase requisitions are internal documents created before receiving approval and placing an order.
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