What is a Purchase Order?

Understanding the different types of purchase orders and how to effectively use them.

A purchase order (also referred to as a PO) is a contractual agreement between a purchaser and a supplier that becomes legal once the details of the purchase order have been accepted by the supplier. It is a document that details the goods or services that the buyer has agreed to buy and the terms of the purchase.

The purchase order helps a business to keep track with what has been bought as not only does it detail the items purchased but also provides a purchase order number that will correspond with invoices and delivery notes. As the document will have details of when cash will be going out of the business and when stock will be arriving helps keep a track of cash flow and stock levels within the company.

A purchase order is also useful for the supplier as any disputes over an order can be resolved by referring back to this as the original agreement.

What are the differences types of purchase orders?

1. Standard purchase order

This is the most common type of order and is used for a single order where all the information is known and can be included on the purchase order form.

The information included will be the relevant addresses, the item(s) to be purchased, the quantity needed, the price and the date to be delivered.

2. Blanket purchase order

A blanket purchase order form is used when a customer places orders for goods or services from its supplier that will be repeated, be delivered on different dates over a specific period and will require multiple payments. It is often used for goods that are expendable as the customer can’t hold all the stock at the same time and may involve differing amounts and quantities

3. Planned purchase order

A planned purchase order is a commitment from the buyer to purchase goods or services from a single supplier over the long term. The buyer is legally bound to commit to the price and the quantity of the item but may not know in advance what the delivery dates will be.

The information included in a planned purchase order will be information on the goods or services required with quantities, costs and possible delivery dates. Once the specific dates for the items to be delivered are known the buyer will submit a release form to the supplier.

4. Contract purchase order

A contract purchase order is for businesses that have not yet indicated to the supplier what goods and services they will be purchasing but want to create a contract purchase agreement to determine what the specific terms will be. This could include information on payment and delivery and forms the basis for a future commercial relationship.

How to raise a purchase order

A purchase order is raised by the buyer and sent to the supplier, the details are usually put into a purchase order template

It can be sent via email or posted to the supplier who will negotiate on or agree to the details on the purchase order form and once agreed send the relevant goods or services to the buyer.

The supplier will then follow this up by issuing an invoice to the buyer and the buyer will then pay for the goods or services within the agreed timeframe.

The steps to creating a purchase order:

  1. Create a purchase order number. This helps both buyer and supplier cross check with deliveries and invoices.
  2. Name and address of the buyers and name and address of where the goods or services are to be delivered.
  3. Details of the shipping including how long it will take and what method of shipping is required.
  4. Name and address of the supplier including details of a contact at the supplying company.
  5. Terms of payment, delivery, shipping and any other relevant terms.
  6. A list of the items to be bought, the quantity required the agreed price and finally the total amount to be paid.

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