Purchase Order Guide: How a Purchase Order Works

A purchase order (PO) is a document that a buyer sends to a seller outlining the details and inventory of a particular sale. A purchase order lists the types and quantity of goods that the buyer will purchase, the pricing of those goods, and the due date for the products. A purchase order functions as a legally binding contract between the buyer and the seller, ensuring that the buyer will pay the seller upon receipt of the requested goods. The purchase order system gives the seller legal protection in the sale, in the case that the buyer fails to pay once the order has been fulfilled. A purchase order will often be included in the packing slip of the delivery package. [Small businesses](https://www.masterclass.com/articles/tips-for-starting-a-small-business) will typically purchase bulk foods from a supplier using purchase orders. A purchase order is a written agreement from a buyer to purchase and pay for a specified amount of goods. It will typically begin the purchasing process between a buyer and a vendor. A buyer will create a purchase order request, complete with all the purchase details, such as the quantity of goods and prices. The buyer submits the form to the supplier. Once the supplier has confirmed that they have the goods to fulfill the order, the supplier will inform the buyer of a purchase order approval, making the contract binding. Once the order is fulfilled, the seller will send the buyer a bill or sales invoice for the purchase order at the agreed-upon prices. The buyer will pay the seller through the seller's purchase order software. Some businesses will create standing purchase orders with suppliers, which automate orders for certain goods that the business needs to purchase on a regular basis. Standing purchase orders streamline the workflow of retail businesses that regularly require restocking. Using purchase orders also gives a company’s purchasing department extra, useful record-keeping information. An invoice and a purchase order are both sales documents confirming that a buyer intends to purchase or has purchased products from a seller. However, there are a few notable differences between what a purchase order and an invoice are. - __Purpose__: A purchase order acts as a contract created by the buyer to confirm the details of the purchase with the seller. An invoice acts as a payment reminder created by the seller to remind the buyer of a debt to the seller for goods delivered or services rendered. - __Sender__: One of the key differences between a purchase order and an invoice is who sends what. The buyer in the transaction is responsible for drawing up a purchase order, while a seller is responsible for sending an invoice to the buyer. - __Timeline__: In the purchasing product, a purchase order is the first document exchanged between the buyer and the seller. This is the purchasing agreement between buyer and seller. An invoice is produced after the procurement process when the purchase order has been fulfilled. - __Protection__: A purchasing order is a written order that functions as a legal document stating the intention of a buyer to purchase a certain amount of goods from a seller. This provides legal protection to the seller, as the order is fulfilled before payment is complete. An invoice acts as a reminder of the debt to be paid as outlined in the purchase order contract. There are many free purchase order form templates online, but you can easily create your own. Here is a general overview of the purchase order process to help you draft your own purchase order. 1. __Draw up a document__. You can create your own electronic purchase order using your preferred word processing or spreadsheet software like Excel. It’s easier to draft your purchase order as a table in order to organize all of your information. 2. __Decide on a purchase order number__. Your purchase order should have a PO number at the top that you can use to reference this particular order. Make sure to use a unique number that both the seller and buyer can use to track their purchase agreements. 3. __Include the date of purchase__. Next to your purchase order number include the date that the buyer has submitted the purchase order. 4. __Write out the buyer details__. Underneath the purchase order number and the date, include a couple of line breaks and then write out your (the buyer’s) details. This should include the company name, billing address, shipping address, and the business owner's name and contact information. 5. __List out the order details of what the buyer needs__. Create a table in your purchase order document so that you can list the products and quantities you’re ordering, including the item number or SKU numbers of all goods as listed by the seller. 6. __List the payment terms and delivery details__. At the bottom of your table or product list in the purchase order, including the total amount to be paid, the payment method, delivery date, shipping terms, and delivery address. 7. __Include "free on board" details__. In international shipping, the FOB is an additional part of the purchase order that details the party responsible for international shipping fees and outlines when the ownership of goods changes hands during the shipping process. Get the [MasterClass Annual Membership](https://www.masterclass.com/) for exclusive access to video lessons taught by business luminaries, including Sara Blakely, Chris Voss, Robin Roberts, Bob Iger, Howard Schultz, Anna Wintour, and more. A purchase order is a business document that states the intention of a buyer to purchase goods from a seller. This extra step in the buying process protects the buyer from receiving the wrong order and protects the seller from potential non-payment.