Order: what it is and how to create one [+ template] (2023)

Purchase orders are a staple of a company's financial documentation, not only for budgeting and expense tracking purposes, but also to keep vendor management under control.

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As a buyer, you would benefit from creating purchase orders to avoid vendor communication issues and unexpected costs.

To help you create your own purchase orders, this article will cover:

  • What is a Purchase Order?
  • How does a purchase order work?
  • Format for purchase order form template
  • Types of purchase orders
  • purchase order system

What is a Purchase Order?

A purchase order, or PO, is a legal document that a buyer sends to a supplier to authorize a purchase. Purchase orders describe what the buyer would like to buy and how much they would like to receive. These agreements help both the buyer and seller to document transactions.

Let's talk about supplier management. You need a specific product or service to run your small business, so reach out to your vendors and tell them what you need. They provide it. You pay them for it. History end.

Sounds too easy? It is. Yes, the property acquisition process can be more complicated than described above. There could be payment issues, supply shortages, miscommunication leading to incorrect shipments and scheduling delays.

However, getting services from reliable providers in a timely and hassle-free manner doesn't have to be too good to be true; It's possible, and using purchase orders can help.

Purchase orders are beneficial to both the buyer and the seller. By issuing purchase orders, small businesses can specify which goods and services are needed from their suppliers and when they are needed.

This keeps business operations efficient and orderly. It also allows the seller to ensure that it can provide the requested goods and services before committing to fulfillment, giving the buyer time to plan accordingly.

In addition, purchase orders can help the buyer and seller maintain accurate and detailed records for audits and financial statements.

How does a purchase order work?

Now that we know what a purchase order is, let's look at the process of creating one.

1. The buyer decides to order items from the seller.

Before an order can be placed, the buyer must identify a need that the seller's product or service can satisfy. During this step, the buyer must identify what product or service is needed, how much is needed (if possible), and when it is needed (again, if possible).

For example, if you need to order new boxes to ship your product orders, calculate how many boxes you need and when you need them.

Let's say you're anticipating a holiday season ahead, you can look at last year's cash order and multiply it by your estimated growth this holiday season to order the correct amount.

2. The buyer writes the purchase order and sends it to the seller for approval.

With the above information, the buyer must write the purchase order and send it to his seller for approval. When submitting the purchase order to a supplier, indicate when approval is required to keep the process on schedule.

Ideally, the response should arrive in time to receive the product or service on time, or should give the buyer enough time to obtain it from another seller, if needed.

Continuing with the example above, once you have identified a supplier who can supply your cases, how many cases you need and when you will need them, you can write your purchase order using this information. Send it to your sales representative or point of contact.

3. Seller reviews the purchase order and confirms that it can fulfill the order.

Once the seller receives the purchase order, it is up to the seller to review the order and check stock or availability to confirm that it can be fulfilled on the requested date.

For box shipping, the supplier reviews your order and, after reviewing its inventory and shipping capacity, determines whether it can fulfill your order.

4. The purchase order is approved.

If the seller can fulfill the request in accordance with the buyer's instructions, the seller will approve the purchase order and make it legally binding on both parties.

Since the box company can fulfill your order, they have sent you an approved copy of the purchase order for your confirmation.

5. Product or Service Compliance.

Once the purchase order is approved, the seller is responsible for providing the product or service as agreed. During this phase, you can also generate andsend an invoiceto the buyer for the amount indicated in the purchase order. The invoice should recap which goods were supplied, the relevant quantity and the amount due.

For example, after approving the shipment of boxes, you should receive the completed order and an invoice for the amount due. This vendor has 30 net terms of payment and expects payment within 30 days of issuing the invoice.

6. The invoice is paid.

In this final phase, the buyer is responsible for paying the invoice in accordance with the payment terms indicated by the seller. It is now up to you, the buyer, to send payment of the invoice in accordance with the agreed payment terms.

Now, for a quick clarification, purchase order and invoice are not synonymous.

Purchase order vs. Invoice

Purchase orders are sent by buyers to suppliers to control and track the purchasing process, while invoices are official requests for payment made by suppliers to buyers when the order is completed.

Purchase Order Format

Ready to create your own purchase order? Here's the information you need to include.

1.Header: Please provide your company details including company name, business address, date of purchase order andpurchase order number.

2.provider information: Indicate the correct recipient of the purchase order. This is where you list the name of the seller company, your specific contact name, and the seller company address.

3.Would you like: Specify where the order should be shipped, what the shipping method is, what the shipping terms are, and the expected delivery date.

4.order details: For each item included in the order, provide a line item with the item code or SKU number, item name or description, requested quantity, unit price, and delivery date for each item .

5.Resume- Complete the purchase order by providing a subtotal, any applicable discounts, taxes, shipping costs, and the grand total.

Sample purchase order form

Here is an example purchase order template that introduces each of the points mentioned above.

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As you can see, you have the option to add multiple products, so there is no need to create different purchase orders per product. In addition, you can get discounts on the final cost and consider shipping and handling.

Interested in downloading this sample?

Purchase Order Template

To create your own purchase order following the above format,download our easy to use purchase order template.

This template comes in two versions: an Excel version and a fillable PDF. We recommend using the Excel version for creating multiple purchase orders for a single supplier and the fillable PDF for single purchases. The Excel template will automatically calculate the final cost for you, making it easy and simple to view totals and discounts.

Types of purchase orders

  1. Standard Purchase Orders
  2. planned purchase orders
  3. general purchase orders
  4. Contract purchase orders
  5. digital purchase orders

It is important to note that not all purchase orders are created equal. At this point, you might be thinking, "If you've seen one purchase order, you've seen them all," but that's not true. There are actually five types of purchase orders, and they differ in the amount of information included.

1. Standard Purchase Orders

Standard Purchase Orders are the most widely used and recognized. In this situation, the buyer is clear about the details of the purchase and can identify which item or service he is buying, the quantity, delivery schedule and payment terms.

For example, a company that is running low on printer cartridges might place a standard purchase order because it knows exactly how much it needs and when it needs to have it. Here's what that purchase order looks like.

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Standard Purchase Orders can be placed for many different resources, depending on your needs. For example, the model above can be defined as:

  • Services to be provided
  • subcontracting
  • Send

2. Planned purchase orders

By placing a planned purchase order, a buyer is estimating your company's future needs for the item in question by submitting a purchase order in advance. In this case, details such as the item, price and payment terms are known, but the quantity is based on a guess and the delivery date is tentative.

For example, if the same company that is running out of printer cartridges places a planned purchase order, the responsible buyer will estimate how many printer cartridges he needs with a more flexible delivery schedule. This is how the purchase order would look.

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3. General purchase orders

With an open purchase order, a buyer places multiple orders at once to negotiate discounted prices.

For example, if the same company can negotiate a better deal by agreeing to order multiple printer and paper cartridges from a single supplier, it might consider using an open-ended purchase order to purchase these items. In this scenario, this is what a purchase order might look like.

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4. Contractual purchase orders

A contract purchase order is the most formal variation. In this case, the buyer and seller sign a contract that outlines the terms of the purchase prior to issuing a purchase order that references the contract. This type of purchase order offers the greatest legal protection for those involved.

Using the example of printer supplies, if a company signs a contract with its supplier that outlines the items, quantity, price, and delivery schedule and follows through with a standard purchase order, these companies would be under a purchase order agreement. Here's what that purchase order looks like.

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5. Digital purchase orders

Having an established process for purchase orders can help the procurement process move forward efficiently and be mutually beneficial for both buyers and sellers.

An easy way to create and share a digital purchase order is in Microsoft Excel or Open Office. You can find pre-existing templates by opening a new spreadsheet and clicking onmore modelsand search for "invoice".

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We've already distinguished between invoices and purchase orders, but you can find both under this keyword in Excel. And of course, you can edit the template to your liking to include specific elements you need.

Finally, now that we've covered the different types of purchase orders, let's talk about the importance of a purchase order system.

purchase order system

Business doesn't end once a purchase order is completed; in supply chain management, there will always be a continuous process to track. This is where having a purchase order system makes the process easier.

A purchase order system is software that generates, tracks and manages digital purchase orders over an optimized and secure network. Without a system in place, important business can be lost in transition and cause friction between buyers and sellers who depend on each other.

To create a purchase order system from scratch, here are some general guidelines to follow:

1. Determine the forms that are right for you.

Review the list of purchase order types again and choose the appropriate purchase order format for your business.

2. Design a workflow with detailed process steps.

To automate the process, you need to describe the steps required to take a purchase order from start to finish. Create a step-by-step workflow that shows the interactions as well as where document data is entered and transferred during the transaction.

3. Dictate role assignments and accessibility.

In your company, you need team members who know how to correctly assign roles to drive the workflow to completion. That same team will need to efficiently define access permissions for the stakeholders in question so that they can contribute to the request in a timely manner.

4. Initiate, fulfill and improve your purchase order system.

When using and adhering to your PO system, you will need to actively gather feedback from stakeholders and your own internal team. Find out where certain steps can be improved and change them in your workflow. Over time, you'll have a future-proof productive system and a smoother supply chain to manage.

Purchase order example

Not sure what a purchase order should look like? The following sample purchase order checks all the boxes: it includes customer information, desired products, shipping terms, and the purchase order number. Also includes a note to the seller.

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image source

Some vendors may prefer to fill in their business information, so on the "Supplier" side of the header, you can leave the information blank for them to fill in.

Purchase orders lead to stronger supplier relationships

Purchase orders benefit both you and your suppliers by ensuring there are no miscommunications during the purchasing process. With the right template, purchase orders can be easy and simple to create, even if you don't have a dedicated supplier relationship manager on your team.

Editor's Note: This post was originally published in October 2019 and has been updated to be more complete.

Subjects: sales flow channeling of agreements

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