Money Matters

What is a purchase order (PO) and how is it used?

If your business buys from suppliers, purchase orders are one of the most important controls you have. Learn what a purchase order includes, how it works, and when to use each type.

Published July 1, 202610 min read Share

When you’re dealing with one supplier and one order, a quick email works fine.

But when you have 10 suppliers, 50 orders, and multiple locations, things can start to unravel without a structured purchase order process.

Without purchase orders, procurement can become inconsistent, leading to mismatched invoices, unclear agreements, and limited visibility when issues arise.

But what is a purchase order, exactly?

Once you understand the main types of purchase orders and how they’re used, you’ll see how they differ from invoices and why they’re essential to so many businesses.

Key Takeaways

• A purchase order (PO) is a document a buyer sends to a supplier to formally request goods or services, specifying what’s being ordered, at what price, in what quantity, and on what terms.
• Once a supplier accepts a PO, the purchase order can become a binding agreement that helps protect both parties if delivery is delayed, items are incorrect, or pricing changes mid-order.
• POs sit at the centre of the procure-to-pay process, helping enable a three-way match between the purchase order, delivery receipt, and invoice.
• A standard PO includes a unique PO number, buyer and supplier details, item descriptions and quantities, payment terms, and delivery information.
• There are four main types of purchase orders: standard, planned, blanket, and contract. Each type suits different buying frequencies, supplier relationships, and levels of order certainty.
• Purchase orders differ from invoices in a key way: the buyer issues the PO before a transaction to request goods or services, while the seller issues the invoice after delivery to request payment.

Here’s what we’ll cover:

What is a purchase order?

A purchase order can be defined as a document a buyer sends to a supplier to formally request goods or services.

A purchase order typically specifies:

• What’s being ordered.
• At what price.
• In what quantity.
• On what terms.

The “binding agreement” element is an important part of the purchase order definition. Once the supplier accepts the PO, the purchase order can become a contract between the buyer and supplier.

That’s a detail many people overlook.

A PO isn’t just an internal record or a polite request. It’s a formal agreement that helps protect both parties if something goes wrong.

If delivery is delayed, the wrong items arrive, or pricing changes mid-order, the PO is the document you refer to.

A purchase order also differs from a sales order, though the two documents are closely related. The buyer creates the PO to initiate and document the purchase; the supplier responds with a sales order to confirm they can fulfil it.

The same transaction has two documents from two different perspectives.

What is the purpose of a purchase order?

Purchase orders formalise and document purchases from external suppliers, from one-off orders to ongoing, multi-location procurement.

In practice, purchase orders play a central role across the procurement workflow, from initial request through to payment and reconciliation.

The procure-to-pay process

Purchase orders sit at the centre of the procure-to-pay process, which follows a clear sequence from request to payment:

1. A need is identified.
2. A purchase order is created and approved internally.
3. The PO is sent to the supplier.
4. The supplier fulfils the order.
5. Goods are received and checked against the PO.
6. The invoice is matched against the PO and delivery receipt.
7. Payment is released once everything aligns.

The three-way match process compares the purchase order, delivery receipt, and invoice. This helps businesses confirm they’re paying for what was ordered, received, and billed.

Beyond individual transactions

Beyond single purchases, POs also function as a budgeting and audit tool.

Because every order is pre-approved and logged, finance teams can track committed spend instead of discovering overspend after the fact.

At audit time, the full documentation trail is already in place.

What does a purchase order include?

A purchase order typically includes five core elements that define and control the transaction between buyer and supplier: a purchase order number, buyer and supplier information, order details, payment terms, and delivery details.

A standard PO usually includes:

• Purchase order number (PON): a unique reference to track the order.
• Buyer and supplier details: company names, addresses, and contact information.
• Order details: item descriptions, quantities, unit prices, and totals.
• Payment terms: how and when payment will be made, such as Net 30.
• Delivery details: shipping address, delivery date, and method.

Together, these fields make the transaction clear, traceable, and easier to manage for both parties.

What are the differences between a purchase order and an invoice?

While purchase orders are sent before a transaction to request goods or services, invoices are sent to request payment after delivery. The PO sets the terms and the invoice collects on them.

Understanding the difference also helps when writing an invoice, because the invoice should reflect the agreed details from the purchase order, including item descriptions, quantities, prices, and payment terms.

Here’s a breakdown of the key differences:

	Purchase order	Invoice
Issued by	Buyer	Seller
Timing	Before the transaction	After delivery
Purpose	Formally requests goods or services	Requests payment
Is it legally binding?	Yes, once the supplier accepts it	Yes; outlines the final amount due
Contains	Item details, quantities, prices, delivery terms	Amount due, payment due date, bank details
Initiated by	An internal purchase request or approval	Fulfillment of the purchase order
Used for	Budget control and procurement tracking	Accounts payable and payment processing

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

Purchase order example

So, what does a purchase order look like in a real-life business setting? Let’s look at a concrete example.

Imagine you run a clothing company preparing for your next seasonal collection, and you need to order fabric from a trusted supplier.

Rather than relying on informal or verbal agreements, you issue a purchase order that clearly defines exactly what you’re buying, from whom, and under what terms.

Here’s what a standard PO for the fabric would include:

1. Basic details for tracking

• Purchase order number: a unique identifier for this specific order.
• Purchase order date: the date the order was created.

2. Buyer and supplier information

• Supplier name and billing address: the supplier’s business details.
• Buyer name and shipping address: your company’s details, including where the order should be delivered.
• Additional contact information: phone numbers and email addresses for both parties.

3. Shipping and delivery terms

• Delivery date: the expected or agreed-upon date for the goods to arrive.
• Shipping method: the chosen transportation method, such as standard freight or express delivery.
• Shipping terms: who is responsible for shipping costs and potential damage.

4. Order details

• Item name: the product being ordered, such as “cotton fabric—light blue.”
• Item description and technical information: specifications such as material composition, weight, and texture.
• Item quantity: the number of units ordered, such as 50 metres.
• Item unit cost: the price per unit measurement, such as $10 per metre.
• Line total: the cost for each item category, such as 50 metres x $10 = $500.

5. Cost breakdown and payment terms

• Taxes: any applicable sales taxes, such as GST/HST, PST, or QST where relevant.
• Total price: the final cost after taxes and discounts.
• Payment terms: how and when payment is expected, such as “Net 30—payment due within 30 days.”

What are the different types of purchase orders?

There are four main types of purchase orders: standard purchase orders (SPOs), planned purchase orders (PPOs), blanket purchase orders (BPOs), and contract purchase orders (CPOs). The right type depends on how often you buy, how well you know your quantities, and the nature of your supplier relationship.

Here’s a breakdown of when to use each.

Standard purchase order (SPO)

A standard purchase order is the most common type of order. It’s used for one-time purchases with clearly defined details.

A standard purchase order includes exact specifications, such as quantity, price, and delivery date.

For example, you need to upgrade the chairs in your office, so you order 50 office chairs from a furniture supplier that need to be delivered in five days.

Planned purchase order (PPO)

A planned purchase order is similar to a standard PO but uses estimated order quantities and dates.

A planned purchase order helps your business plan future purchases ahead of time. It can be useful when you know you need specific products or services but don’t know the exact delivery schedule yet.

For example, if you manage a restaurant and need to estimate monthly supply orders for fresh produce, you might use a PPO.

Blanket purchase order (BPO)

A blanket purchase order, also known as a standing order, is useful for recurring purchases over a set period.

A blanket purchase order locks in pricing and terms upfront, but you can decide on specific quantities and delivery dates later.

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

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

Contract purchase order (CPO)

A contract purchase order is the most flexible type of PO.

A CPO establishes a long-term agreement with a supplier but doesn’t specify exact order quantities upfront.

You’ll typically use a CPO when you expect to make multiple purchases from the same supplier over time but don’t have fixed details yet.

Say you handle accounting for a construction company that partners with a supplier for various building projects. Since material needs change from project to project, a CPO keeps the relationship in place without committing to specific quantities right away.

Manage purchase orders effectively with PO software

As your business grows, managing purchase orders manually becomes harder to control.

Missed orders, mismatched invoices, and limited visibility into what’s been committed or spent can quickly reduce the control a good PO process is supposed to provide.

Purchase order software automates the process from creation through to payment, giving finance teams the controls and visibility they need without the administrative overhead.

Explore how Sage purchase order software and invoicing software can help your business stay organised and in control.

Frequently asked questions about purchase orders

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