What is a purchase order?

When your business buys goods or services, you need a clear and organized system to track those transactions. That’s where Purchase Orders (POs) come in.

A PO is a formal document that you send to a supplier to request goods or services, helping you stay in control of your finances, streamline procurement, and avoid miscommunication with vendors. 

In this guide, you’ll explore everything you need to know about purchase orders—what they are, how they differ from invoices, the different types of purchase orders, and why they’re essential for businesses of all sizes.

Whether you run a small startup or a large enterprise, understanding POs helps you keep your purchasing process efficient and hassle-free.  

Here’s what we cover:

Purchase order definition

Ready to get a handle on purchase orders? The first step is understanding what they are and how they fit into your buying process. 

A purchase order is a legally binding document that you send to a supplier when ordering goods or services. It acts as an official request and outlines all the important details to keep things clear and organized. A typical PO includes:

• Purchase Order Number (PON): a unique reference number to track the order. 

• Buyer and seller details: company names, addresses, and contact information. 

• Order details: a breakdown of what you’re ordering—description, quantity, and price. 

• Payment terms: how and when payment will be made (e.g. on delivery or net 30) 

• Delivery details: where and when the order should be shipped.

Once the supplier accepts the PO, it becomes a contract, protecting both sides by making sure everything is documented. This keeps your business organized, accountable, and on track financially—no confusion or disputes, just smooth transactions. 

A common question is the difference between a sales order and a purchase order. Simply put, a PO is created by the buyer to request goods or services, while a sales order is issued by the supplier to confirm they can fulfill that request.  

Purchase order vs invoice: The differences

Many people confuse purchase orders and invoices, but they serve completely different purposes in the buying process. So, what is the purpose of a purchase order? It acts as a formal request from a buyer to a supplier, outlining the details of a purchase before the transaction takes place. In contrast, an invoice is sent after goods or services are delivered to request payment. 

To clear things up, here’s a quick breakdown: 

Who issues it? 

• PO: sent by the buyer to request goods or services. 

• Invoice: sent by the seller after delivering goods or services.  

When is it sent? 

• PO: sent before the transaction to confirm the order. 

• Invoice: sent after the transaction to request payment. 

What’s its purpose? 

• PO: lists order details, pricing, and terms that have been agreed upon. 

• Invoice: requests payment from the buyer.  

Is it legally binding? 

• PO: yes—once the seller accepts it, it becomes a contract. 

• Invoice: yes—it outlines the final amount due and payment terms.

Think of a purchase order as setting up your business’ transaction and an invoice as finalizing it by requesting payment. Both documents keep things organized and protect both parties, making sure you and your seller are on the same page.  

Example of a purchase order

A PO is typically a formal document with clearly labeled sections to ensure accurate transactions. Want a clearer picture of what does a purchase order look like? Here’s a purchase order example: 

Imagine you’re running a clothing company, and you’re preparing for the next season’s collection. You need to order fabric from a trusted supplier. Instead of relying on verbal agreements, you create a PO to outline exactly what you’re ordering. 

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

1. Basic derails for tracking 

• Purchase order number: a unique identifier for this specific order. 

• Purchase order date: the date the order was created. 

2. Buyer and vendor information 

• Vendor 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 (e.g., standard freight, express delivery). 

• Shipping terms: who is responsible for shipping costs and potential damage. 

4. Order details 

• Item name: the product being ordered (e.g., “cotton fabric – light blue”). 

• Item description and technical information: specifications such as material composition, weight, and texture. 

• Item quantity: the number of units ordered (e.g. 50 meters)  

• Item unit cost: the price per unit measurement (e.g., $10 per meter) 

• Line total: the cost for each item category (e.g., 50 meters x $10 = $500). 

5. Cost breakdown and payment terms  

• Taxes: any applicable VAT, GST, or sales tax. 

• Total price: the final cost after taxes and discounts. 

• Payment terms; how and when payment is expected (e.g., “Net 20 – payment due within 30 days”). 

Types of purchase orders

The type of PO you use depends on your business needs and level of commitment with suppliers. Understanding why and when to use each type makes sure your POs are accurate, efficient, and aligned with your purchasing strategy. 

Here’s a breakdown of the four main types of purchase orders and when to use them: 

1. Standard Purchase Order (SPO) 

SPO is the most common type of order, used for one-time purchases with clearly defined details. It includes exact specifications, such as quantity, price, and delivery date. For example, you need to upgrade the chairs in your office, and order 50 office chairs from a furniture supplier that need to be delivered in 5 days. 

2. Planned Purchase Order (PPO) 

This type is similar to a standard PO, but with estimated order quantities and dates. It helps your business forecast and plan future purchases ahead of time, being ideal when you know you need a specific product or services but not the exact delivery schedule. For example, you manage a restaurant and need to estimate monthly supply orders for fresh produce. 

3. Blanket Purchase Order (BPO) 

Also known as a standing order, blanket purchase orders are perfect for recurring purchases over a set period. It 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 ensure you always have the supplies you need. For example, 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 predictable. 

4. Contract Purchase Order (CPO) 

CPO is the most flexible type of PO. It 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 vendor over time but don’t have fixed details yet. Example: 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. 

The right purchase order depends on how often you buy, your supplier relationships, and how much flexibility you need. Whether you’re making a one-time bulk order or setting up long-term agreements, choosing the right type—like electronic purchase orders—helps keep your purchasing process organized, efficient, and stress-free.

Why use purchase orders in business?

No matter the size of your business, purchase orders help keep your buying process organized and efficient. Whether you’re placing a simple order or managing complex transactions, the benefits of purchase orders include greater clarity, improved accountability, and better financial control. 

Here’s why they’re essential for both buyers and sellers: 

Benefits for buyers 

• Stay on budget—pre-approved orders help prevent overspending and keep finances in check. 

• Better record-keeping—creates a clear paper trail for tracking expenses and making audits easier. 

• Strong supplier relationships—ensures on-time, accurate deliveries, reducing the risk of delays or mix-ups. 

• Protect against fraud and disputes—serves as a legally binding agreement, helping you avoid payment issues or audit headaches. 

Benefits for sellers 

• Fewer errors and misunderstandings—clearly outline order details, reducing the chance of miscommunication. 

• Guaranteed payment security—acts as a contract, making sure you get paid for the goods or services you provide.  

• Easier inventory management—helps plan stock levels more effectively based on confirmed orders. 

• Faster processing and payments—streamlines invoicing and speeds up the payment collection process. 

Final thoughts

As your business grows, a simple cash-for-goods system just won’t cut it. Managing multiple orders, suppliers, and payment terms can quickly become overwhelming without tools in place. 

With digital purchase orders, you can automate PO creation, eliminate manual paperwork, and reduce errors. Real-time tracking ensures you never lose an invoice or struggle to keep up with your orders. Plus, it enhances supplier management, helping you secure better pricing and ensure on-time deliveries. 

If you’re looking for an easier way to handle purchase orders explore how our purchase order software can simplify your purchasing process today.