Mar 06, 2022

Purchase Order Form: What Is It and Why It’s Important

by Arielle Kushner

purchase order form

The purchase order form must be understood by any professional who works in procurement or supplier management. Obtaining the goods and services your business needs to continue operating is a lot more complicated than heading out to the store to purchase supplies. The entire procurement process is full of risk, from the possibility of incorrect shipments, payment issues, and delivery delays, to various other potential issues.

Thankfully, it’s possible to ensure a binding and seamless purchasing process between a client company and supplier, and it takes the form of a document known as the purchase order form. 

What exactly does this form entail, and how does it contribute to an overall healthy procurement process? Read on to learn more about purchase order forms and why they’re necessary to a streamlined procurement process.

What Is a Purchase Order Form?

A purchase order form (PO form) is needed whenever you want to purchase goods and services from a vendor. A purchase order form is used as an official record and contractual agreement of the business transaction between buyer and supplier, and outlines key information of the order. It is important for record keeping, auditing, and matching the PO to the invoice in order to issue payment. 

Examples of what should be included in a purchase order form are the exact items and number of items ordered, the payment terms, and the delivery schedule. Special requests from the buyer or specific terms and conditions from the seller might be included as well, if applicable.

Once both parties agree to the terms, the purchase order form is signed and becomes a legally binding agreement. The buyer also adds in a unique PO number to help track the payment, which eventually is recorded on the invoice that comes from the seller after delivery.

Why It Matters

Purchase order forms not only standardize an organization’s procurement procedure, but also cut down on remediation costs should any issues arise. PO forms, for example, help by:

  • Keeping the procurement operation organized, documented, and (most important) legally binding.
  • Allowing for the seller to know what to ship out at what time and for the buyer to know what to expect at the delivery date.
  • Resolving any errors or mistakes in the ordering process by giving both sides a common reference point to use.
  • Giving accurate, detailed records of the business transaction to both parties for auditing or financial recordkeeping purposes.
  • Making cash flow and inventory management easier by leaving a formal paper trail of business transactions.

While you might not need this level of precision for smaller, or one-off purchases, POs make the most sense when working with a complicated, high-volume purchase. However, they are always a good idea when it comes to keeping the purchasing process organized, on track, and having accurate purchasing records. 

Types of Purchase Orders

As business transactions are varied in scope and needs, purchase order forms come in many types depending on the information you want to include.

  • Standard purchase orders cover the basics of what we’ve discussed previously. Whether you’re looking for new office supplies or need professional services contracted, most standard documents work well for these purposes.
  • Blanket POs work well for large or long-term purchases where bulk discounts are a possibility. Companies have a chance to negotiate discounted pricing for a blanket purchase order.
  • Planned orders are used whenever a buyer can predict future need and must submit an order form in advance. All the details from any PO are included here except that the intended delivery date and order volume are typically tentative.
  • Contract purchase orders are used whenever the most legal protection is needed. Both parties in this case agree on a legally binding contract before the PO process begins. This option is the most formal variation of the purchase order form.
  • Digital forms are a relatively new development. Using digital tools and document processing programs, businesses can make PO production and processing consistent across all their orders.

Attesting to the complicated nature of business-grade procurement management, these purchase order forms are actually not the only documents you’ll be working with.

Comparisons with Other Similar Documents

Do not confuse purchase orders with other similar documents in the procurement process, like invoices and order forms.

When a seller accepts an order from a client business, it then produces a sales invoice with all the payment and shipping terms, as well as the amount due, and sends it to the buyer. Both parties must have copies of the document so that the right approval workflows occur and the shipment is verified upon delivery. By contrast, a purchase order is written by the buyer and does not act as a bill.

Order forms may be used in some processes and are more similar to purchase orders in that the buyer fills one out to begin an ordering process. The main difference, however, is that the official order form template is provided by the seller, and, as a result, the buyer is placing an order on the terms of the vendor.

What Does a Purchase Order Form Look Like?

A purchase order form needs to be complete in order to do its job properly. Improved purchase order management can depend on a quality purchase order form template and the elements to include.

A PO Number

A purchase order number is a short code the buyer uses to organize its long list of POs easily. Should you ever have to search for an order made in the past, a quick check of the PO number is the fastest way to reference the information you need.

In most cases, businesses use a PO database and assign numbers chronologically, with the first purchase order numbered as #00001, the second as #00002, and so on.

The Order Details

POs must include the objective details regarding the transactions. These order terms form the meat and potatoes of a PO document.

  • Each item being ordered and its description
  • The order volume
  • The subtotal
  • Any additional costs or discounts, such as applicable taxes and bulk discounts

Put all these figures together to form the final total with all adjustments taken into account. This amount should be clearly printed, possibly in bold, to prevent confusion.

The Delivery Details

A purchase order form must also talk about order fulfillment and how delivery protocols will work. Details to include here are:

  • The destination address
  • The name of the proper recipient
  • The company making the business transaction (which is not necessarily the same as the destination)
  • Shipping costs and the shipping method

Billing information may also be included, such as the billing address (possibly different from the shipping address) and the name of the entity paying for the order.

Other Information

It’s not uncommon for specialized purchase orders to include extra details that might be useful for recordkeeping.

  • Signatures of the people approving the order
  • The foreign currency if the business transaction occurred internationally
  • The payment method, such as check, credit, cash, or otherwise
  • The tracking number for tracked orders
  • Insurance in case the goods are damaged or lost

And finally, it’s also worth noting that a consistent layout for each purchase order is ideal, as it makes referencing older documents easier and helps prevent confusion. For instance, a header at the top with the same lines of information should be present on every PO document. As we’ll discuss soon, digital purchase order forms work best for achieving this consistency.

How the Purchase Order Process Works

Now let’s look at purchase order forms in the context of an overall procurement and purchase order process. How does such a document work with the other mechanisms in your buying procedures? A typical breakdown of the steps in a purchasing process follows.

  • Initial order: The client business starts by determining an internal need with a purchase request, and once approved decides on a vendor to provide the product or service. The exact amount of the needed shipment, as well as the timeframe to receive it, is considered. For instance, holiday rush hours are usually a time to order extra equipment to handle the spike in demand.
  • PO creation: The buyer then crafts a purchase order and forwards it to the seller for approval. The approval time must be specified and should be on schedule to keep the whole process running smoothly. If using an automated solution, the PO can be generated automatically once the purchase request is approved. 
  • PO approval: The seller checks its own stock and approves the purchase order form if the relevant products or services are available for shipping. It then sets out to fulfill the transaction. Delivery dates are determined at this stage.
  • Fulfillment: The seller then writes up an invoice as a way to request payment from the buyer. This document matches with the analogous purchase order and consequently contains the same information about the goods provided, their amounts, and the final price.

In the end, the buyer receives the shipment and the invoice and pays the amount agreed on, or indicated on the purchase order form. The purchase order and invoice are a perfect duo for verifying the agreed-upon payment terms.

Challenges of Traditional Purchase Order Systems

While purchase orders can be written and processed manually, doing so opens the door for inefficiencies and potential human error, especially if your business works with a large number of transactions with multiple suppliers regularly. For instance, you might run into:

  • Lost or incomplete data: Not having a consistent format for all your PO forms can result in certain types of information being missing from the document, which can lead to confusion, wrong orders, or payment disputes.
  • Tangled approval workflows: PO documents, like other paperwork in the procurement process, must first go through the right approvals with a purchase request. A missed approval means that a major stakeholder did not agree to the transaction before it was made. Putting processes in place to ensure POs cannot be made without prior approval is important.
  • Plain human error: From sloppy handwriting to basic typos, minor mistakes can cause major headaches for both the buyer and seller as either one attempts to hunt down the correct information.

To ensure a complete, official, and professionally-written purchase order form at an efficient cost, procurement teams should turn to purchase order software.

How Electronic Purchase Order Forms Are Changing the Industry

B2B transactions are never a one-time consideration. Supply chain needs always result in an ongoing process of finding new suppliers, ordering needed supplies and services, and working with purchase order forms.

Since it’s such a common document to work with, it makes sense why companies should look at creating a formal purchase order system for consistent and efficient form processing. Once POs go through a secure network of policies and procedures, working with multiple large orders becomes a lot more effective and less error-prone. Part of that initiative is picking up electronic purchase orders, which are picking up steam as businesses are switching to digital platforms to handle their operations.

If you want to build a purchase order system for your organization, some general steps to get started include:

  • Know what you want to achieve: Whether it’s the removal of human error, fraud prevention, or cost savings, there are multiple reasons why electronic PO management is a good idea.
  • Set up purchase order templates: Use the list of PO document components provided above to form a general template that all your POs will follow. This setup ensures that no essential information is ever missing from a purchase order.
  • Map out the PO lifecycle: From order creation to final fulfillment, map out each specific step of the order processing procedure. This way, you can find out where to apply automation tools and how to handle PO document data during the transaction.
  • Assign responsibilities: Which team members have which roles in the purchasing process? Set up your stakeholders early on to make approval workflows more streamlined.
  • Implement and improve: Once the purchase order system is underway, collect feedback from both internal users and your suppliers. Making improvements over time this way is a goal of many procurement professionals, as 41% of those surveyed in a McKinsey study said that they were actively improving spend visibility.

Automation helps immensely when working with purchase order forms. For instance, it can integrate with inventory management to generate new POs automatically when stock goes low. Automated approvals ensure that the right people, from internal stakeholders to the vendor, receive notification of a new order. Benefits like these are the reason why digital platforms are the future for procurement and supply chain management.

Interested in implementing a spend management system that simplifies and streamlines your business’s existing process? Check out Approve.com and request a free demo today!

Related Posts

group 204

See what modern
purchasing looks like.