A purchase order or PO is a business document prepared by a buyer and sent to a supplier. The PO becomes legally binding once the supplier accepts it. In the PO, the buyer lists all the items they wish to buy at a certain price.

Other items on the PO include the expected date of delivery, as well as the terms of payment. While in the past buyers created POs manually, today most businesses have partially automated the process. That has led to improved payment and inventory tracking, and overall efficiency.

Purchase Order

  1. Why Use Purchase Orders?
  2. Preparation of the PO
  3. Purchase Order Functions
  4. How Buyers Process Purchase Orders
  5. How a Supplier Processes Purchase Orders
  6. The Processes that a Purchase Order Undergoes
  7. How a Supplier Uses a Service Order
  8. Purchase Order Software

Why Use Purchase Orders?

Businesses and organizations use purchase orders when buying supplies on account, while suppliers use the PO as security when supplying the goods and services. Suppliers can also use the PO to keep track of the inventory they have shipped, and what is still at hand.

On the other hand, buyers can use Purchase Orders to take inventory of items received. Other users of POs are commercial lenders, who use them as a reference when lending funds to a supplier.

Preparation of the PO

The Purchase Order is usually prepared in the purchase or procurement department. While a few buyers may still be creating the PO manually, a majority of enterprise buyers use purchase order software.

Purchase order software allows better tracking and sharing of PO with suppliers in real-time. Most important, PO software uses standardized forms, which helps to eliminate human errors.

Some of the important details of the purchase order include:

  • A PO number
  • Shipping date
  • Shipping address
  • Billing address
  • Requested items
  • Quantities
  • Item prices

The PO number is used to match purchases with shipments, as well as matching invoices for the supplied items. The rest of the details ensure the suppliers understand how to fulfill the PO, and the two parties can use them to make any follow-ups.

Purchase Order Functions

In most cases, a purchase order is used by an organization that wants to procure goods or services on its account. It allows the service provider to supply the service or item to the buyer before the actual payment is made. This process is possible as the purchase order serves as legal protection against risk. Additionally, purchase orders allow for the comparison between different vendors to determine the best deal.

Purchase orders ensure the completion of payment for orders. Also, buyers retain a copy of a purchase order to ensure the timely reception of goods or services.

How Buyers Process Purchase Orders

As soon as the supplier acknowledges receiving a PO from a buyer, the buyer creates an in-progress status for the PO. The status remains in “in-progress” mode until all the items have been received.

After the items are received at the shipping address indicated in the PO, the buyer scans them into inventory. The buyer then changes the PO’s status to “pending payment” or “processed,” if the payment has been made. The buyer ends their legal obligation by making the payment indicated on the PO.

How a Supplier Processes Purchase Orders

A supplier uses PO to source and delivers goods or services to their buyers. Suppliers, just like buyers also legally required to keep their PO for future reference.

In some states such as California, businesses should keep the PO records for as long as 7 years. That requirement holds even after a business winds up its operations.

When a supplier receives the PO, they use it to get the requested items from their inventory and package them for shipping.  After packaging the items, the supplier ships them and then updates the PO and inventory system accordingly.

Finally, the supplier fills out important details such as expected time of arrival, tracking numbers, and payment dates/reminders. This final step is important for the purposes of credit enforcement and customer satisfaction.

The Processes that a Purchase Order Undergoes

Immediately after the generation and approval of a purchase order by a buyer, the order proceeds through several processes. These processes are described as follows.


Usually, the procurement department or unit of an organization is responsible for creating purchase orders, which are done using a specific type of software. This software typically allows for improved tracking, management, and submission of purchase orders to service providers. All generated purchase orders contain a unique order number, which allows for the matching of purchases with shipments. Additionally, other useful information is provided on the purchase order, which includes the shipment address, shipping date, billing address, inventory of requested goods with prices, and quantities. Software applications that support the creation and submission of purchase orders provide templates with fields that allow an organization to input the data of required items or services and send it to the service provider for subsequent supply.


Went the purchase order is shipped to the service provider, the status of the order changes to “in-progress” status. This status remains the same until the organization physically receives the goods. The received order is scanned into the inventory to allow for matching with the purchase order. When the correct match is made, the order’s status changes to “processed”. At this point, the buyer is obligated to remit funds for the received goods. All payments made to service providers should contain each purchase order’s code to guarantee accurate disbursement of payment.

How a Supplier Uses a Service Order

Purchase orders are not only used by buyers but rather, but they are also used by suppliers. Suppliers utilize purchase orders to deliver and request payment. As soon as the supplier receives a purchase order, it is utilized to gather all purchased items for packing and shipment. Next, an invoice note is developed, which contains all information on the purchase order and more. The invoice is attached to the package and shipped to the shipping address of the buyer. When a shipment leaves the supplier’s warehouse or store, the supplier records information in the inventory scheme.

The inventory scheme is filled and managed electronically. Paper copies are filled where required. The supplier marks the order as ‘awaiting payment’ within its electronic inventory system. To ensure proper management and collection of payment, a supplier must be sure to input reminders of deadlines and essential payment dates.

Purchase Order Software

Overall, that is all there is to creating and processing purchase orders. If you do not have PO software, then contact us now. PO software can streamline the way you process and budget for your inventory.


The purchase order is instrumental in the procurement of items or services for both buyers and suppliers. The buyers usually produce, approve, and send purchase orders to service providers for supply. The suppliers make use of the same purchase orders to supply goods to the buyers at the required shipping addresses.

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