Whether you’re a buyer or a seller, purchase orders can help your business save money, stay organised and legally protected. Learn what a purchase order is, why they’re important and what they’re used for in this article.
We’ll cover the main types of purchase orders you might come across and how to create your very own or read another business’ purchase orders. Discover:
- What is a purchase order?
- How do purchase orders offer businesses legal protection?
- What’s the difference between a purchase order and an invoice?
- Types of purchase orders
- How to make a purchase order
- Simplify your business and accounting admin with Countingup
What is a purchase order?
A purchase order is a document that sellers and buyers use to communicate orders of goods more efficiently and form the first step in a business transaction. Purchase orders are typically used where buyers have an established relationship with sellers: offering the ability to buy goods in bulk more easily and cheaply.
- For buyers, purchase orders allow them to clearly and quickly communicate what they’d like to purchase, with the total usually added to a rolling tally that’s settled at the end of the month or financial quarter (meaning they can pay later).
- For sellers, purchase orders allow them to simplify their cash flow and purchasing system with buyers, and have a more accurate inventory of goods since batch orders can be tracked more easily than smaller ones.
How do purchase orders offer businesses legal protection?
Purchase orders on their own don’t necessarily form a legally binding agreement between businesses; it’s only when the supplier accepts the order that there is a binding agreement between both parties. For this reason, the legal protection that purchase orders offer businesses, on balance, favours the seller more than the buyer.
- For buyers, purchase orders (once accepted) allow them to hold the seller to their agreement: the goods ordered must be supplied by the specified date and at the specified prices.
- For sellers, purchase orders allow them to hold buyers to their agreement: the buyer must pay the total for the goods they’ve purchased by the date agreed upon in the purchase order (or invoice).
What’s the difference between a purchase order and an invoice?
There is a lot of overlap between the two documents regarding the information that each should include. If you’re reading or issuing purchase orders and invoices, you may think it’s pointless to repeat everything.
However, the main difference between purchase orders and invoices is when they’re issued and the legal weight they hold as a result:
- Buyer sends purchase orders to seller
- Seller accepts the purchase order
- Seller issues an invoice to buyer as the goods are delivered
From this, we can see that invoices indicate an established business relationship and transaction that needs to be settled. Purchase orders can be refused and tweaked (for example, if stock levels are low). For this reason, purchase orders aren’t necessarily legally binding – you would need something to prove it was accepted in full (like an email).
Types of purchase orders
Single-use or ‘Standard’ purchase order
Like the name suggests, this purchase agreement is for one order. It will remain in place until all the items have been received by the buyer.
Planned purchase order
Planned purchase orders usually cover a longer agreement period: allowing the buyer to anticipate future needs and have stock suppliers ready on short notice.
Blanket purchase order
This type of purchase order covers large transactions or broad categories of goods that need to be replaced regularly (like office stationery or breakable items like glasses or plates).
Contract purchase orders
A contract purchase order is similar to a purchasing agent for a firm. The goods ordered in each transaction might vary considerably (for whatever reason) and so favourable pricing and purchasing priority is given on the basis that the relationship between each business is ongoing and close, rather than based on repeated orders of the same core goods.
How to make a purchase order
Much like the advice available on our How to make an invoice guide, making a purchase order is almost identical.
Step 1: Make it clear and professional
The first step is to make sure your document looks professional and lists your business information. At a minimum, make sure to include your business name (even if it’s just your name), address, phone number, and email address. If you have one, add a logo and use your business’ colour scheme.
You should also make sure it’s clear that the document is a purchase order (simply adding ‘purchase order’ at the top of your document would be enough to make it stand out.
Step 2: Add a unique identification number
You’ll need a reference for your invoices later on – this is the number that makes orders and payments traceable across your business paper trail and bank account. This reference is called a unique identification number (UIN), and is a requirement from HMRC on self-employed invoicing, so you must also keep a record for tax purposes.
You can use numbers that gradually increase with each purchase order and add letters in front of the number to separate your different clients or customers.
Step 3: Include blank space for your client’s information
Next, you need to leave a box for clients to fill in their own information. This is important so you can follow up with them about their order to confirm or make changes if need be. You should also leave a box open for clients to specify when they need the order fulfilled for a specific date or as a planned purchase order.
Step 4: Specify your payment terms
Arguably, the most crucial step in creating a purchase order is making sure it specifies when and how you expect to get paid.
To do this, list how you prefer to take payment (such as debit card, PayPal, bank transfer, etc.) and the expected payment date after you deliver the goods or service. It’s common to use a 30-day billing cycle, but it can be however long you choose.
Step 5: Leave space for clients to list the goods (or services) they want
Clients complete purchase orders, so you’ll need to leave room for them to fill in what they want. Make sure to leave columns for quantity and price so each essential billing aspect of the order is easy to fill.
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