What Is a Purchase Order? How POs Differ From Invoices
A purchase order comes from the buyer before anything ships; an invoice comes from the seller afterwards. Here is what each does and when a small business needs POs.
A purchase order (PO) is a document a buyer sends to a supplier to request specific goods or services at agreed prices and terms. It is issued before delivery and states exactly what is being ordered. Once the supplier accepts it, the PO becomes the shared reference for what should arrive, when, and at what cost.
What a purchase order usually contains
- a unique PO number, which the supplier quotes on the delivery note and invoice;
- the buyer's and supplier's names, addresses and contact people;
- item descriptions, quantities, unit prices and totals;
- delivery address and requested delivery date;
- payment terms, such as net 30;
- shipping terms and who pays for freight;
- the name of the person who approved the order.
The purchasing cycle, step by step
- Need identified. Someone in the business needs stock, materials or a service. Larger teams may record this as an internal purchase requisition.
- Approval. The request is checked against budget and approved by whoever holds that authority.
- PO issued. The order is sent to the supplier with its number and terms.
- Supplier accepts. Acceptance may be a signed copy, an order confirmation or simply shipping the goods, depending on the arrangement.
- Delivery. Goods arrive with a delivery note or packing slip, and someone checks them against the PO.
- Invoice received. The supplier bills, quoting the PO number.
- Three-way match. Before paying, the business compares the PO, the delivery record and the invoice. Quantities, prices and terms should agree across all three.
- Payment is made by the due date and recorded in the books.
The three-way match is the step that earns POs their keep. It catches invoices for goods never received, prices that crept up between quote and bill, and duplicate billing.
Purchase order vs invoice
| Purchase order | Invoice | |
|---|---|---|
| Issued by | The buyer | The seller |
| Timing | Before goods or services are delivered | After delivery, or at an agreed billing point |
| Purpose | Requests and authorises a purchase | Requests payment |
| Key reference | PO number | Invoice number, usually quoting the PO number |
| Effect on the buyer's books | Normally none until goods arrive or a bill is received | Creates an amount payable |
| Effect on the seller's books | Normally none; it is an order, not a sale | Creates an amount receivable |
Kinds of purchase order
- Standard PO: a one-off order with known items, quantities, prices and dates.
- Planned PO: items and prices are set, but delivery dates are scheduled later through releases.
- Blanket PO: covers repeated purchases from one supplier over a period, often with a spending cap, so a fresh PO is not needed for every delivery.
- Contract PO: sets general terms with a supplier; individual standard POs then refer to it.
Does a small business need purchase orders?
A sole owner buying office supplies with a business card probably does not. POs start to pay off when:
- more than one person can order on the company's behalf;
- orders are large, custom or made to specification. When ordering branded merchandise, for example, approving a sample before a bulk run (as our guide to making acrylic keychains recommends) and then fixing the quantities on a PO prevents expensive surprises;
- you buy from the same suppliers repeatedly and want a clear record of what was agreed;
- a lender, investor or auditor wants evidence of spending controls.
The reverse also applies. If you supply larger businesses, expect to receive their POs and to quote the PO number on every invoice; buyers with strict processes, including many distributors and retailers (see our article on working with food distributors in the USA), may not pay an invoice that lacks one.
Is a purchase order legally binding?
Once a supplier accepts a PO, it can form part of a binding contract, though the details depend on the jurisdiction, any terms printed on the PO and any conflicting terms from the supplier. For high-value or long-running supply agreements, have the terms reviewed by a legal adviser.
Mistakes that undo the benefits
- Issuing the PO after the goods have already been ordered by phone, so it records rather than controls the purchase.
- Paying invoices without checking them against the PO and delivery note.
- Changing quantities or prices verbally without updating the PO.
- Leaving POs open for months after delivery, which clutters reports of committed spending.
Quick answers
Can a purchase order be changed?
Yes, through a change order or revised PO that the supplier accepts. Keep both versions so the history is clear.
Do I need special software?
Not at first. A numbered template and a simple log can work; many accounting packages also include purchase order features that link POs to bills, which supports the routine described in our guide to bookkeeping basics.
General information only. For contract terms or audit requirements specific to your business, consult a qualified adviser.