How Does a Purchase Order Work?

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If you’re running a business of your own, you will likely need to use a purchase order. But what exactly is this document, and why do you need it?

Essentially, a purchase order is a legal document that binds both singing parties, usually between a supplier and a buyer. It outlines all the items that are being purchased, as well as the unit prices for each. The purchase order – also referred to in short form as a “PO” – details the payment terms and delivery date for the items bought.

Back in the day, purchase orders were paper-based and tended to be cumbersome to have to deal with. However, these days, computer systems have made the PO process much easier and more streamlined. They also help to ensure better tracking of inventory and payment. Luckily, you can get your hands on a free online PO template that includes all details needed for you to keep tabs on your shipments and payment receipts.

Why Do Purchase Orders Exist?

PO’s are generally used when a purchaser wants to buy supplies from a vendor on account, which means the items will be delivered by the supplier before payment is made. The PO essentially serves as a promise or protection that the payment will be made at some point in the near future. Not only are PO’s able to legally protect the supplier, they are also important for tracking payments and managing inventory.

POs can help suppliers compare what has been ordered to what has actually been paid for. Buyers retain their own copies of purchase orders in order for them to be able to better monitor receipt of payment for the items ordered and shipped.

Suppliers can use PO’s for order fulfillment and processing payments. When a purchase order is received, suppliers will use it to pull the inventory purchased for timely packaging and shipping. After the inventory has been pulled off the shelf, an invoice is then prepared for shipment. After products have been shipped out, they are recorded in the supplier’s inventory system.

Purchase orders are electronically filed, and the order will either be marked as “waiting payment” or “filled.” Payment reminders can be set that are automatically sent out to both suppliers and buyers to remind them that payments are stilling pending. This helps the buyer remember to make payment, and helps the supplier remember that they are still owed payment for items that have already been delivered.

In order to operate a successful business and keep your cash flow in the positive, be sure to use an up-to-date PO form to help you keep track of your payments.


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