Purchase Orders Explained

A purchase order (PO) is one of the simplest and most useful documents in business: a written instruction from you to a supplier saying “we want to buy this, at this price, delivered by this date, under these terms.” It takes minutes to create and prevents an entire category of disputes.

Yet many small businesses don’t use them. They order by phone or email, the invoice arrives, and then begins the argument: “we didn’t agree to that price,” “we ordered ten, not twelve,” “delivery was supposed to be Friday.” A purchase order ends those arguments before they start, because both sides agreed in writing beforehand.

Why This Matters

It locks in the agreement. Price, quantity, delivery date, payment terms, written down and acknowledged before anything is delivered. When the invoice matches the PO, payment is straightforward. When it doesn’t, you have the document that proves what was agreed.

It controls spending. A PO process means someone authorises each purchase before it’s made. No more discovering at month-end that three people each ordered the same thing, or that spending happened nobody approved. For growing businesses, this is often the first real spending control.

It speeds up payment, and disputes. Suppliers love POs because they remove payment friction: match the invoice to the PO, pay it. And when something is wrong, wrong quantity, wrong price, late delivery, the PO is the reference point for the conversation. “Per PO-1042, delivery was due Friday” is more effective than “I thought you said Friday.”

It creates an audit trail. Every purchase documented: what, from whom, for how much, authorised by whom. At year-end, during a tax review, or when a new manager asks “why are we buying from them?”, the trail answers.

Key Concepts

The PO itself. A purchase order has a unique number and includes: supplier details, your details, a description of what’s being ordered, quantities, agreed prices, delivery date and address, payment terms, and the name of the person authorising it. That’s the whole document. One page is normal.

PO vs invoice. The PO comes first, it’s your offer to buy. The invoice comes after delivery, it’s the supplier’s request for payment. The two should match. The matching of PO to invoice (and to the delivery note, if you want to be thorough) is the basic purchasing control: it confirms you got what you ordered at the price agreed before you pay.

Authorisation levels. Not every purchase needs the owner to sign off. Set thresholds: team members can approve up to a certain amount, managers up to a higher amount, larger purchases need senior approval. Write the thresholds down. This keeps small purchases moving while controlling big ones.

The PO register. A running log of every PO issued: number, date, supplier, amount, status (ordered, delivered, invoiced, paid). The register is how you track open orders, follow up on late deliveries, and see spending patterns. Without it, POs are just scattered documents.

Blanket POs. For repeat purchases from the same supplier, monthly stationery, regular materials, a blanket PO covers a period or a total value instead of each individual order. It reduces paperwork while keeping the control. Set an expiry or a value cap, and review it when it ends.

Change and cancellation. Sometimes an order needs to change, quantity, delivery date, or be cancelled. Document the change against the original PO number rather than starting over informally. The trail stays clean.

Practical Steps

1. Create a simple PO template. One page with all the fields listed above and a sequential numbering system (PO-0001, PO-0002, and so on, or with a year prefix). Use it for every purchase above a threshold you set. Start the threshold low enough to build the habit.

2. Set authorisation thresholds. Decide who can approve what. Example: team leads up to a modest amount, managers higher, owners above that. Put it in writing. Review the thresholds yearly as the business grows.

3. Issue the PO before the work starts. The PO goes to the supplier before delivery, not after. A PO created after the invoice arrives is just paperwork, it provides none of the control. Make “no PO, no order” the rule for anything above your threshold.

4. Get the supplier’s acknowledgement. Ask the supplier to confirm the PO, even a reply email saying “confirmed” is enough. This closes the loop: both sides have the same understanding. Unacknowledged POs are where “we never agreed to that” disputes come from.

5. Match invoice to PO before paying. When the invoice arrives, check it against the PO: same items, same quantities, same prices. If it matches, approve payment. If it doesn’t, query it before paying, it’s much harder to recover an overpayment than to withhold one.

6. Maintain the PO register. Log every PO when issued and update its status as things progress: ordered, partially delivered, delivered, invoiced, paid. Review open POs weekly, anything overdue gets chased. The register is also your spending data: what you buy, from whom, how often.

7. File everything together. PO, supplier acknowledgement, delivery note, invoice, keep them together, physically or digitally, filed by PO number. When a question arises months later, the complete set is in one place.

Common Mistakes

Ordering without a PO, then creating one after. Backdating POs to match invoices defeats the entire purpose. The control happens before the commitment, not after.

No authorisation, anyone can buy anything. The PO exists but nobody approves them, or the requester approves their own. The authorisation step is what makes the PO a control rather than a formality.

Vague descriptions. “Services as discussed” on a PO is worthless when there’s a dispute. Describe what’s being bought specifically enough that a stranger could verify delivery against the PO.

Not matching invoices to POs. Issuing POs but paying invoices without checking them against the PO is half a system. The match is where overcharges and duplicate invoices get caught.

Losing track of open orders. POs issued and forgotten, deliveries never chased, invoices never matched. The register only works if statuses are updated. Review open items regularly.

Verbal changes to written orders. “We agreed on the phone to change the quantity”, undocumented changes create the exact disputes POs are meant to prevent. Confirm every change in writing against the PO number.

One-off POs for repeat spend. Issuing a separate PO for every weekly delivery from the same supplier is paperwork for its own sake. Use blanket POs for genuine repeat purchasing, with caps and review dates.

Relevant Templates

• Vendor Payment Terms Sheet, record the payment terms you’ve agreed with each supplier so POs and invoices stay consistent.
• Vendor Quote Comparison Sheet, the PO price should trace back to a compared quote; keep the comparison on file.
• Vendor Communication Log, log order-related conversations so verbal agreements and changes are captured in writing.
• Vendor Dispute Log, when a PO, delivery, and invoice don’t line up, track the dispute to resolution instead of letting it drift.