What is a PO?

Managing stock is one of the more bread and butter tasks of running a business, and purchase ordersare an important way of keeping track of the items you buy.

It’s easy to get confused about the difference between a purchase order and an invoice, so in this guide we’ll explain how to raise a PO – and more – to keep your buyer-supplier relations running smoothly.

What is a purchase order?

A purchase order, often abbreviated to ‘PO’, is an order placed by a buyer to a supplier. It’s a legally binding document which displays a list of what you want to buy, including quantities, the types of products, and the agreed prices for each item.

A purchase order is a contract between the buyer and seller, and when you place an order, you’re agreeing to purchase the goods for the specified price.

What’s the difference between a purchase order and an invoice?

The purchase orderis created by the buyer, whereas an invoice is a bill issued by the seller – this is the key difference. Also, the PO is raised before the purchase, while the invoice is usually issued once the buyer has agreed to a purchase, or after an order is delivered.

Another difference between a purchase order and invoiceis that the former outlines the proposed terms of a sale, whereas the latter confirms the sale and requires payment by a certain date.

What are the benefits of a purchase order?

Some businesses don’t raise POs, perhaps as a way of reducing admin, but there are some potential benefits of using purchase orders that you may want to consider:

1. Track your product inventory. If you’re running low on stock, your purchase order gives you a record of the quantity of items you’ve ordered, with a unique PO number which could help you keep on top of the eventual delivery.
2. Set expectations. Your purchase ordersgive your suppliers a clear sense of what you need from them, which may increase the likelihood that they’ll have items in stock in the future.
3. Avoid confusion. Having your order specified in a document could reduce any mistakes in communication – such as ordering the wrong amount over the phone where you may be misheard or misunderstood, with no proof of the order.
4. Flexibility.By raisinga PO, you can set out the exact quantities you need, when you want them delivered by, and you don’t have to pay until a later date when the invoice is raised. Also, a product’s popularity can change overnight, but you can always tweak your purchase orders as demand dictates.
5. Legal protection.A purchase orderis a legally binding document once the buyer and seller have agreed to the sale. Having a legal document could protect you if you ever experience a supplier dispute; for example, if you didn’t receive an order you’d paid for.

If you’re a business that receives purchase ordersand issues invoices, many of these benefits apply from a seller’s perspective too. When you receive a purchase order you can track the sales you’ve made, and know that a buyer has legally committed to paying you.

How to raise a PO

The purchase order process is perhaps not as daunting as it may seem at first. Here are some steps to follow if you’re looking to raise a purchase order for the first time:

• You can use Microsoft Word, Excel or other specialist software to start creating your PO from scratch. You may be able to find a purchase order template online – it should look a little like an invoice.
• Include the date of issue and PO number (typically positioned in the top-right). The PO number is a unique reference number that can match your purchase with its eventual shipment, which can help the item arrive safely.
• At the top of the purchase order, state the company addresses of you and the seller (plus your shipping address).
• The main table is where you can include information like the products needed, the quantity, a description and the price per unit – all in separate columns.
• Below this, you can include terms of payment in an additional field, such as the delivery date, and any other requirements. You can also include a separate column to state the total sum of the purchase.

You can then email your purchase order to your supplier – perhaps by saving as a PDF – or ask for their preferred method of receiving the PO.

More from Tyl

There are lots of spinning plates when it comes to running a company, but our articles may hopefully provide some guidance on how to approach your day-to-day realities as a business owner – from purchase orders to marketing. Read more over at Tyl Talks:

• Tackling unpaid invoices
• How to improve business cash flow
• What's an invoice?

Disclaimer

This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.

Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.

Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.