A purchase order (PO) is an official business document issued by a buyer to a seller promising to buy some specified good at a certain price soon. This grants the buyer the advantage of placing an order without having to make an immediate payment.
To the seller, on the other hand, it means that they can offer the seller a line of risk-free credit since payment would be received upon delivery.
Just like with the invoices, every issued purchase order will contain a unique number to be used by both the buyer and seller when referencing payment as well as the dispatch and delivery of the ordered goods.
A blanket PO suggests a commitment by the buyer to purchase from a specific seller on an ongoing basis until a certain set limit is attained.
With the purchase order definition out of the way, let’s dive into the contents of a good PO.
What does a Purchase Order Contain?
A purchase order will highlight different things, here are some common ones:
- Brand names, model numbers, and SKUs
- Delivery date
- Delivery location
- Purchased quantity
- Items being purchased
- Unit price
- Billing address
- Payment terms and payment methods
How a Purchase Order Works
A purchase order helps simplify and legalizes the purchasing process as described below:
- A buyer raises a requisition for the purchase of a product or service for use by the business.
- The buyer will prepare and send out a purchase order to the seller either electronically or otherwise. (See the Purchase Order template below).
- The PO is received by the seller and a confirmation is sent to the buyer regarding the ability to fulfill the order. If the seller is unable to fulfill the order, he notifies the buyer and the PO is canceled.
- Assuming the seller is able to fulfill the PO, the order is prepared by running it against the inventory and locating it by responsible staff.
- The seller ships the order with the original PO number referenced on the order for tracking by both parties.
- The seller will then invoice the order using the original PO number so the buyer knows which order they’re paying for upon delivery.
- The buyer pays for the order upon receipt as per the agreed terms of payment.
Purchase Order Template
To create a professional purchase order from scratch, follow the below procedure:
- Create a new document page and add your business details including name, address, contacts, shipping information, as well as the logo. If you have an existing letterhead, be sure to paste the content on a new page to save you the trouble of having to key in the above details.
- Type in the seller information under a section marked “vendor”.
- Itemize the products you wish to purchase together with costs.
- Add any other relevant information as you may find fit.
- Save a copy of the PO on a designated purchases order folder – under the vendor’s name.
- Finally, save a copy of the PO as a PDF file and email it to your vendor.
To put things into perspective, here’s what your purchase order should look like:
Having trouble wrapping your head around any of these? Don’t hesitate to get in touch with us.