What is a purchase order?

It seems logical to start this guide off by answering a simple question: what is a purchase order? Here’s
what you need to know:

Definition

Purchase orders (POs) are documents sent from a buyer to a supplier with a request for an order. Each
PO will outline the specifics of a purchase request, including an order description, quantity of items, and
the agreed-upon price and payment terms. They also identify the purchase order (PO) number.

When a seller – like a supplier or a vendor – accepts a purchase order, a legally-binding contract is
formed between the two parties.

Although purchase orders add a few extra steps to the purchasing process, they help to ensure a smooth
transaction between the buyer and the seller. They also help reduce the risk of fulfilling an incomplete
or incorrect order. In short, these documents are an opportunity for the buyer to clearly and explicitly
communicate their request to the seller.

On top of this, if the buyer refuses payment upon delivery of a good or service, the seller is protected
because the purchase order acts as a binding contract between both parties.

Lastly, some commercial lenders will use purchase orders as a reference to provide financial assistance
to an organization.

How do purchase orders work?

In order to streamline the purchase of goods and services that an organization requires to operate
successfully, a purchase order must follow a strict step-by-step procedure known as the purchase order
process.

In this section, we’ll explain who and what is involved in this process within an organization.

Understanding the steps in the purchase order process

The purchase order process is the journey a PO takes from creation through to closure and everything in
between. Depending on the nature of a company (size, industry, human resources, organizational
structure, the goods and services it is acquiring, etc), the purchase order process can also be modified to
include additional necessary steps like quality checks, budget approval, contractual approval, and more.

Here are the steps in the purchase order process:

Create a PO

Approve a PO

Send a PO to the vendor

PO Received (Binding Contract)

Receipt of Goods or Services

Invoicing

3-Way Matching

Authorize and Arrange Payment

PO Closure