What is a purchase order?

If your business buys goods or services, you need a clear and organized system to track those purchases. This is where Purchase Orders (POs) come in.

A PO is a formal document that you send to a supplier to request goods or services, helping you stay in control of your finances, plan purchases, and avoid miscommunication.

In this guide, you’ll explore everything you need to know about purchase orders—what they are, how they differ from invoices, the different types of purchase orders, and why they’re important to businesses of all sizes.

Whether you’re a small startup or a large enterprise, understanding POs helps you keep your purchasing process efficient and hassle-free.

Here’s what we’ll cover:

Purchase order description

Ready to get a handle on purchase orders? The first step is to understand what they are and how they fit into your buying process.

A purchase order can become part of a legally binding contract once accepted by the supplier, subject to agreed terms and conditions.

It works like an official application and displays all the important details to keep things clear and organized. A typical PO includes:

• Purchase Order Number (PON): unique reference number to track the order.

• Buyer and seller details: company names, addresses, and contact information.

• Order details: breakdown of what you are ordering—description, quantity, and price.

• Payment terms: how and when it will be paid (eg payment on delivery or 30 days from invoice date)

• Delivery details: where and when the order should be shipped.

What is the difference between a purchase order and an invoice?

Many people confuse purchase orders with invoices, but they serve completely different purposes in the purchasing process.

So, what is the purpose of a purchase order?

It acts as a formal request from the buyer to the supplier, defining the details of the purchase before it takes place. In contrast, an invoice is sent after the goods or services have been delivered to request payment.

To clarify things, here is a quick explanation:

Who take it out?

• PO: sent by a buyer to request goods or services.

• Invoice: sent by the seller after delivery of goods or services.

When is it shipped?

• PO: sent before purchase to confirm the order.

• Invoice: sent after purchase to request payment.

What is your purpose?

• PO: lists the order details, prices, and agreed terms.

• Invoice: requests payment from the buyer.

Is it legally binding?

• PO: yes—once the seller accepts it, it becomes a contract.

• Invoice: yes—confirms the amount due and terms of payment based on the agreed contract.

Think of a purchase order as setting up a transaction for your business, and an invoice as finalizing a request for payment.

Both documents keep things organized and protect both parties, ensuring you and your seller are on the same page.

An example of a purchase order

A PO is usually a formal document with clearly labeled sections to ensure accurate transactions. Want a clear picture of what a purchase order looks like?

Here is an example of a purchase order:

Imagine you own a clothing company, and you are preparing the next season’s collection.

You need to order fabric from a reliable supplier. Instead of relying on verbal agreements, you create a PO to accurately describe what you are ordering.

Here’s what a typical fabric PO will include:

1. Basic tracking information

• Purchase order number: a unique identifier for this particular order.

• Purchase order date: the date the order was created.

2. Buyer and seller information

• Seller’s name and billing address: supplier’s business details.

• Buyer’s name and shipping address: your company information, including where the order should be delivered.

• Additional contact information: phone numbers and email addresses for both parties.

3. Shipping and delivery conditions

• Delivery date: the expected or agreed date for the goods to arrive.

• Shipping method: selected shipping method (eg, standard freight, express delivery).

• Shipping terms: who is responsible for shipping costs and possible damages.

4. Order details

• Item name: the product to be ordered (eg, “cotton fabric – blue”).

• Item description and technical information: details such as material composition, weight, and texture.

• Item quantity: the number of units ordered (eg, 50 meters).

• Unit cost of an item: price per unit measure (eg £10 a metre).

• Line total: the cost of each section of material (eg 50 meters x £10 = £500).

5. Cost breakdown and payment terms

• Taxes: any applicable VAT or other relevant taxes.

• Price: final cost after taxes and discounts.

• Payment terms: how and when payment is expected (eg, “Amount 30 – payment due within 30 days”).

Types of purchase orders

The type of PO you use depends on your business needs and the level of supplier commitment.

Understanding why and when to use each type ensures that your POs are accurate, effective, and aligned with your purchasing strategy.

Here is a breakdown of the four main types of purchase orders and when they are used:

1. Standard Purchase Order (SPO)

SPO is the most common type of order, used for one-time purchases with clearly defined details. It includes specific specifications, such as quantity, price, and delivery date.

For example, you need to upgrade the chairs in your office and order 50 office chairs from a furniture supplier that must be delivered within 5 days.

2. Planned Purchase Order (PPO)

This type is similar to a regular PO, but with limited order amounts and dates.

It helps your business forecast and plan future purchases, great if you know you need a certain product or service but not the exact delivery schedule.

For example, you run a restaurant and need to estimate monthly supply orders for a new product.

3. Blanket Purchase Order (BPO)

Also known as standing orders, blanket purchase orders are ideal for recurring purchases over a set period of time.

It locks in prices and terms in advance, but you can decide on specific prices and delivery dates later.

If your business has ongoing relationships with suppliers, a BPO can streamline your purchase order process and ensure you always have the supplies you need.

For example, you run a printing company that orders bulk paper supplies throughout the year as needed. Instead of placing multiple individual orders, BPO simplifies the process and keeps costs predictable.

4. Contract Purchase Order (CPO)

CPO is the most flexible type of PO. It establishes a long-term contract with the supplier but does not specify the exact amount of the order in advance.

You’ll typically use a CPO if you expect to make multiple purchases from the same supplier over time but don’t yet have firm details. Example: you manage the accounting of a construction company that works with a supplier on various construction projects. As material requirements change from project to project, the CPO keeps the relationship in place without committing to specific prices immediately.

The right purchase order depends on how often you buy, your relationship with your suppliers, and the level of flexibility you need. Whether you’re placing a one-time bulk order or setting up long-term deals, choosing the right type—like electronic purchase orders—helps keep your purchasing process organized, efficient, and stress-free.

Why use purchase orders in business?

Regardless of the size of your business, purchase orders help keep your purchasing process organized and efficient. Whether you’re placing a simple order or managing a complex purchase, the benefits of purchase orders include greater transparency, improved accountability, and better financial control.

Here’s why they’re important to both buyers and sellers:

Consumer benefits

• Stay on budget—pre-approved orders help prevent overspending and manage finances.

• Better record keeping—creates a clear paper trail to track expenses and simplify audits.

• Strong relationships with suppliers – ensure timely, accurate delivery, reducing the risk of delays or disruptions.

• Protect against fraud and disputes—it acts as a legally binding agreement, helping you avoid payment problems or headaches.

Benefits for sellers

• Fewer errors and misunderstandings—clearly explaining order details, reducing the chance of miscommunication.

• Guaranteed payment guarantee—works like a contract, guaranteeing that you will be paid for the goods or services you provide.

• Simple inventory management—helps plan stock levels more effectively based on confirmed orders.

• Faster processing and payments—streamline invoices and speed up the payment collection process.

Simplify your purchasing process with digital purchase orders

As your business grows, a simple cash flow plan won’t cut it. Managing multiple orders, suppliers, and payment terms can quickly become overwhelming without the tools in place.

With digital purchase orders, you can automate PO, eliminate manual paperwork, and reduce errors. Real-time tracking ensures you never lose an invoice or struggle to keep up with your orders. Also, it improves supplier management, helping you secure better prices and ensure on-time delivery.

If you’re looking for an easy way to manage purchase orders, check out how our purchase order software can simplify your purchase process today.