What is a Purchase Order?
Purchase Order Definition
A purchase order (PO) is a formal document that buyers send to sellers to authorize specific purchases. It specifies products, quantities, prices, and payment terms before any transaction occurs. Once accepted, it becomes a legally binding contract between both parties, giving finance teams essential spend control and audit trails.
Legal Status of a Purchase Order
Yes, a purchase order becomes a legally binding contract once the seller accepts it. The seller can confirm acceptance with a signature, an official acknowledgment, or by fulfilling the order. This agreement protects both the buyer and the seller. It obligates the seller to deliver the specified goods or services and requires the buyer to pay according to the agreed terms.
Purchase Order vs Invoice
Purchase orders and invoices are related but serve different functions in the procurement process. A buyer creates a purchase order at the beginning of a transaction to request goods or services. In contrast, a seller issues an invoice after fulfilling the order to request payment. The PO authorizes the purchase, while the invoice confirms the debt and initiates the payment cycle.
How Purchase Orders Work
The purchase order process creates a clear and auditable workflow that finance teams rely on for spend control and compliance. The five-step process ensures proper authorization and documentation:
Authorization before spending: Prevents unauthorized purchases
Clear audit trail: Supports financial compliance and reviews
Accurate matching: Reduces billing errors and disputes
Step 1 - Buyer creates purchase order
The buyer's procurement or finance department creates the purchase order. It includes all necessary details like product specifications, quantity, and pricing. The PO is then assigned a unique number for tracking.
Step 2 - Supplier reviews and approves PO
The seller receives the PO and confirms they can fulfill the order as specified, then formally accepts it.
Step 3 - Supplier delivers goods or services
The seller provides the products or services according to the terms outlined in the accepted PO.
Step 4 - Supplier issues invoice
After delivery, the seller sends an invoice to the buyer that references the original PO number.
Step 5 - Purchase order matching and payment
The buyer's accounts payable team performs a three-way match. They compare the PO, order receipt, and invoice to ensure consistency before approving payment.
Benefits of Using Purchase Orders
Setting up a formal PO system delivers measurable benefits for finance teams managing rapid growth:
Budget control: Track committed expenses before payment to prevent budget overruns
Spend authorization: Eliminate unauthorized purchases through required approvals
Error reduction: Prevent duplicate orders and incorrect payments through systematic matching
Compliance support: Create audit-ready trails that simplify financial reporting
Cash flow visibility: Understand future payment obligations for better forecasting
Types of Purchase Orders
Businesses use different types of purchase orders depending on the nature of the purchase.
Standard purchase orders
Used for one-time, specific purchases where all details like item, quantity, price, and delivery date are known upfront.
Blanket purchase orders
Used for recurring needs over a period of time, allowing a buyer to place multiple orders against a single PO without renegotiating terms.
Contract purchase orders
This is a formal agreement where a buyer and seller establish terms for future purchases. The PO itself does not list specific items or quantities.
Planned purchase orders
A long-term agreement for a specific item with tentative delivery schedules and quantities, which are confirmed later.
What Should Be Included in a Purchase Order Template
A purchase order lists all the relevant details that are required by both the customer and the business that sells the product and creates an invoice that can be tracked by them. Usually, a template or format is followed while preparing a purchase order.
These include:
A purchase order number, customer number, and order date
Product/Service purchased.
Quantity of the product/service and the price per unit.
Tax rates and discounts if applicable.
Authorized signature of buyer.
Delivery information and billing details.
Payment terms (fixed time period/on the day of delivery of the product).
Using a standardized PO template ensures consistency and completeness in procurement documentation. It helps finance teams track all committed spend and maintain accurate records for budget management. Templates also reduce processing time and minimize errors by including all required fields upfront.
How to Use a Purchase Order
Purchase orders follow a standardized workflow that finance teams can implement to control spending. The process begins when a department requests specific goods or services.
The requesting department submits a purchase requisition to finance or procurement. Finance reviews and approves the request, then creates a formal PO with all required details. The approved PO gets sent to the supplier for acceptance.
POs benefit both buyers and suppliers by establishing clear expectations upfront. Buyers gain spend control and payment scheduling, while suppliers receive confirmed orders with agreed terms. For recurring purchases, blanket orders streamline the process over extended periods.
Streamlining Purchase Order Management for Growing Businesses
As businesses scale, managing purchase orders manually becomes inefficient and prone to error. Integrating PO workflows with a comprehensive revenue operations platform helps automate procurement and ensure financial accuracy through streamlined quote-to-cash processes. This allows finance teams to maintain control over spending while supporting rapid growth without bottlenecks. See how Chargebee helps you monetize with confidence — book your personalized demo today.
Frequently Asked Questions About Purchase Orders
What is the difference between a PO and an invoice?
A purchase order is created by the buyer at the start of a transaction to request goods or services, while an invoice is created by the seller after delivery to request payment. The PO authorizes the purchase and establishes terms, whereas the invoice confirms the transaction and initiates the payment process.
How does a PO get paid?
Purchase orders themselves are not paid directly. Payment occurs when the seller sends an invoice referencing the PO number, and the buyer's accounts payable team matches the PO, delivery receipt, and invoice before processing payment according to the agreed terms.
Four main types of purchase orders
The four main types are standard POs for one-time purchases, blanket POs for recurring needs over time, contract POs that establish terms without specific quantities, and planned POs for long-term agreements with tentative schedules. Each type serves different procurement scenarios and budget management needs.
Can a purchase order be canceled or modified?
Yes, purchase orders can be modified or canceled if both the buyer and seller agree to the changes before goods are delivered or services are performed. Changes should be documented in writing to maintain proper audit trails and avoid disputes.
Who is responsible for creating a purchase order?
The buyer's procurement or finance department typically creates purchase orders after receiving and approving purchase requisitions from requesting departments. This centralized approach ensures proper spend authorization and maintains consistent processes across the organization.
Additional reads
More reads about financial processes for growing businesses:
How finance controllers manage strategic financial processes from procurement to revenue recognition.
Where does an invoice come into the picture? The 7 Essential Elements of an Effective Invoice.
