What is a Purchase Order and How to Generate One for Free

Ever felt that sinking feeling when an invoice arrives with unexpected costs, or a crucial order for your business fails to show up on time? These frustrating situations often stem from a lack of clear agreements with your suppliers. This is where purchase orders (POs) come in to save the day.

If you’re ready to ditch procurement headaches and learn about the power of purchase orders, you’ve come to the right place. In this guide, we’ll explain everything you need to know, including how to create them for free. Let’s get started!

What is a purchase order?

Before we dive into all the ways purchase orders can streamline your business, let’s get clear on the basics.  A purchase order (PO) is your official way of telling a supplier exactly what you need.  It’s more than just a shopping cart – it includes details like:

• What you’re buying: Specific items or services, along with how much you want.
• The agreed-upon price: No surprises when the invoice arrives!
• Delivery dates: Know when to expect your order.
• Payment terms: How and when you’ll pay the supplier.

Think of a PO as a mini-contract between you and the seller. It protects both of you and provides a clear reference point if anything unexpected happens.  No more miscommunications, just organized buying!

Why Purchase Orders Matter, Even If You’re a Small Business

It’s easy to fall into the trap of thinking “we’re too small for formal purchase orders” or “we know our vendors, we don’t need that paperwork.” Trust us, those headaches will catch up with you as your business grows! Here’s why POs are an essential tool, regardless of your company’s size:

Growth brings complexity

Even if you start with simple ordering processes, things change as your business expands. New suppliers, urgent orders, more intricate purchases – this is where miscommunication happens without the clarity a PO provides.

Mistakes are more costly at scale

A small miscommunication might be overlooked when you’re ordering a few items. But when volumes increase, those misunderstandings can snowball into lost inventory, project delays, and financial complications.

Preventing “he said, she said” disputes

Relying on informal agreements leaves you vulnerable. Did you agree on 10 units or 100?  Was that price per item or per case? Without a purchase order, resolving these disputes fairly gets stressful for both you and your supplier.

Paper trails matter

A purchase order isn’t just about the transaction itself. It’s your proof of what was agreed upon.  This is essential if anything goes wrong – late delivery, wrong items, or even discrepancies with invoices.

What should a purchase order contain?

Now that you understand why purchase orders are so important, let’s get into the nitty-gritty of what makes a good one. While formats can vary, there are essential elements that should always be included:

Key Information about You and the Supplier

• Your Company Information: Name, address, contact details (include an email specifically for purchase orders if you have one).
• Supplier’s Information: Name, address, contact details.

Order Specifics

• PO Number: A unique tracking number you assign.
• Date Issued: The date the PO was created.
• Itemized list of goods/services: Clear descriptions, quantities, unit prices, and line totals (subtotal for each item).
• Shipping Instructions: Delivery address, preferred carrier, any special handling needed.
• Agreed Delivery Date: When you expect to receive the goods/services.

Financial Details

• Payment terms: How you’ll pay (e.g., net 30, credit card), and any applicable discounts.
• Subtotal: Total cost of goods/services before taxes and shipping.
• Taxes: Any applicable sales tax amounts.
• Shipping Cost: If charged separately by the supplier.
• Grand Total: Final amount due to the supplier.

Optional (But Recommended)

• Approval Signature: Space for an authorized person in your company to sign off on the PO.
• Terms and Conditions: Outline return policies, warranty information, or other legal details.

Remember, these are the core elements for most purchase orders, but every business is different. Business software like SystemX allow you to customize your POs even further. You can add fields like item categories, budget categories, or even attach relevant documents. This lets you tailor your purchase orders to fit your specific business needs.

What a Purchase Order looks like:

While a purchase order’s specific design can vary, they generally share a similar structure to ensure clarity and ease of use. Think of them as a mix between an official order form and an invoice. Here’s what an official purchase order would look like:

How Do Purchase Orders Work?

Now that you understand the components of a purchase order, let’s break down the typical PO process:

1. Buyer Creates the PO:  The buyer (that’s you!) carefully fills out a purchase order, providing all the essential details about the desired goods or services, quantities, pricing, and delivery expectations.
2. Internal Approval (Optional):  Depending on your company’s policies, the PO might require approval from a manager or designated person before being sent. This helps prevent unauthorized purchasing.
3. Sending the PO to Supplier: The PO is transmitted to the supplier, usually by email, fax, or through a specialized procurement system like SystemX.
4. Supplier Review:  The supplier carefully examines the purchase order to ensure they understand the requirements and can fulfill the order as requested.
5. Supplier Acceptance or Negotiation:
   • Acceptance: If everything looks good, the supplier officially accepts the PO, often by signing it or confirming electronically. This transforms the PO into a binding contract.
   • Negotiation: If the supplier needs to change pricing, quantities, or delivery dates, they may send a revised PO back to you for review.
6. Order Fulfillment:  Once the PO is agreed upon, the supplier works on providing the goods or services as outlined.
7. Receiving and Invoice:  When the order arrives, you compare it to the original PO to ensure everything is correct. The supplier then sends an invoice referencing the PO number.
8. Payment:  You process the invoice according to the agreed payment terms.

Key Point: A purchase order isn’t just a piece of paper – it represents a clear understanding between you and your supplier, minimizing the risk of frustrating misunderstandings.

Purchase Orders in Practice

Let’s bring the power of purchase orders to life with a real-world example. Imagine you’re a management consultant with the following scenario:

• The Project: You’ve been hired by a local manufacturing company to streamline their production processes. Part of your recommendations involves upgrading their outdated inventory management software.
• Finding the Right Solution: After careful research, you identify a software vendor that seems like a perfect fit for your client’s needs. You negotiate pricing and licensing terms.
• Creating the Purchase Order: To formalize the order, you’d issue a purchase order to the software vendor. It includes:
  • Specific Software and License Count: Exact software name, version, and the number of user licenses needed.
  • Agreed Price: Total cost, including any discounts or one-time setup fees
  • Implementation Support: If the vendor is providing installation or training services, those details are itemized on the PO.
  • Delivery Timeline: Not just software delivery, but an estimated date for when the system will be fully up and running.
  • Payment Terms: Whether it’s full payment upon implementation, installments, etc.

Why a PO Matters in This Scenario:

• Protects your client: The PO becomes a reference point for the project. If pricing changes or the implementation gets delayed, you have documentation to advocate for your client.
• Clear expectations for the Vendor: The software company knows exactly what they’re obligated to deliver, and when.
• Professionalism: It demonstrates to both your client and the vendor that you manage projects in an organized and accountable manner.

The Power of Electronic Purchase Orders

Paper-based purchase orders are a relic of the past.  They’re slow, prone to errors, and can create a chaotic trail of documents.  Electronic purchase order systems, like SystemX, revolutionize the entire process, bringing efficiency, clarity, and valuable insights to your business.

Accelerate Your Procurement

Electronic purchase orders accelerate every step of the process.  Forget waiting for forms to circulate, risking them getting lost, or struggling to decipher handwritten notes. With just a few clicks, you can generate POs instantly using pre-approved templates, automatically route them for approval, and send them directly to suppliers. This rapid pace translates into getting what you need faster, keeping projects on schedule, and satisfying customers.

Eliminate Costly Errors

Electronic systems aren’t just about speed; they also significantly reduce costly mistakes. Built-in error checks flag potential discrepancies before they become problems. Prices and totals are calculated automatically, and drop-down menus help prevent incorrect data entry. These safeguards minimize the frustration and financial impact of wrong orders, delayed shipments, and unexpected invoices.

Gain Visibility

Perhaps the most powerful aspect of electronic purchase order systems is the visibility they provide. No more guesswork when it comes to your procurement data. You’ll have instant insights into your total spend versus budget, on-time delivery performance of your suppliers, and opportunities to renegotiate for better pricing.  This level of clarity enables data-driven decision-making to optimize spending and boost your bottom line.

Seamless Integration

The best electronic purchase order systems impact far beyond efficiency.  They create a centralized hub where all POs, invoices, and related documents are easily accessible and searchable.  Some offer supplier collaboration portals, enhancing communication.  Mobile-friendly systems allow you to approve POs or check an order’s status on the go, while seamless integration with your accounting or inventory software streamlines processes across your business.

The Competitive Advantage

Electronic purchase orders aren’t a luxury; they’re a competitive advantage. By embracing this technology, you’ll gain the speed, accuracy, and insights necessary to streamline procurement, optimize spending, and fuel your business growth.

Benefits and Considerations of Using Purchase Orders

By now, the advantages of using purchase orders should be clear. Let’s summarize the key benefits and then discuss a few things to keep in mind:

Pros

• Clarity and Accuracy: POs eliminate misunderstandings, ensuring both you and the supplier are on the same page about what’s being ordered, quantities, prices, and delivery expectations.
• Budget Control: POs function as a pre-commitment for spending, helping you stick to your budget and prevent unauthorized purchases.
• Reduced Errors and Disputes: The structured nature of POs, along with built-in error checks in electronic systems, minimize order mistakes and the resulting headaches.
• Legal Protection: A purchase order is a binding agreement, protecting you in case of delivery discrepancies, pricing issues, or quality problems.
• Improved Supplier Relationships: POs foster clear communication and accountability, leading to stronger vendor relationships in the long run.

Cons

• Implementation: Setting up a purchase order system, especially an electronic one, will take some initial time and effort.
• Potential Bureaucracy: In very small businesses, POs might initially feel like extra paperwork. It’s essential to find a balance between necessary documentation and agility.
• Supplier Cooperation: Some suppliers, particularly smaller ones, might not be accustomed to formal POs. You may need to educate them about your process.

The Verdict

For most businesses, the benefits of using purchase orders far outweigh the cons. They introduce the kind of organization and clarity that’s crucial for streamlining your purchasing processes, saving you money, and protecting your business interests.

Purchase Order vs. Invoice: Understanding the Difference

If you’re new to purchase orders, it’s natural to wonder how they differ from invoices. While they share some information, their purpose and timing are distinct:

• A Purchase Order (PO): Is your official request to a supplier. Think of it as saying, “I want to buy this, at this price, and have it delivered by this date.” You create the PO before receiving anything.
• An Invoice: Is the supplier’s bill.  They send it after delivering the goods or services, requesting payment according to the terms you agreed upon in the PO.

Key Differences

Feature	Purchase Order	Invoice
Purpose	Formalizes your intent to buy	Requests payment for goods/services already provided
Timing	Issued before goods/services are received	Issued after goods/services are provided
Details	Items, quantities, prices, delivery, payment terms	Similar to PO, plus invoice number, issue date, due date
Binding	Becomes a contract when the supplier accepts	Legal obligation for the buyer to pay
Who Creates	The buyer	The seller

In Short: A purchase order initiates the transaction, while an invoice is the final step, requesting payment for what was agreed upon in the PO.

Is a Purchase Order a Contract?

Yes, a purchase order functions as a legally binding mini-contract between you and the supplier. Once the supplier accepts your order, it establishes a clear agreement detailing multiple obligations:

• The supplier must deliver the exact goods or services outlined in the PO, at the agreed-upon price and within the specified delivery timeframe. Any changes to these terms would require renegotiation and a new agreement.
• You, the buyer, are obligated to pay the agreed-upon amount according to the payment terms specified in the PO.

This contractual nature of a purchase order safeguards both parties. If the supplier fails to deliver as promised, you have legal standing to seek remedies, such as requesting correct items, negotiating a delay, or even claiming damages if their failure causes significant harm to your business. Similarly, the supplier has legal recourse if you refuse to pay without a valid reason outlined in the purchase order’s terms and conditions.

How to Generate Your Own Purchase Order for Free

Sure, you could create your own purchase order template from scratch. But why reinvent the wheel? Save time and avoid potential errors by using our free purchase order generator. It lets you quickly customize and issue professional POs, ensuring all the necessary details are included for seamless transactions with your suppliers.