What Is a Purchase Order? The SMB Guide to POs

Key takeaways

• A purchase order is a buyer-issued document that becomes a binding agreement once the seller accepts it.

• Purchase orders give small businesses spend control, a clear paper trail, and easier invoice matching.

• A purchase order comes before the invoice, so the two documents work together across the buying process.

• You can start with a simple purchase order template and move to software as your purchasing grows.

What is a purchase order?

A purchase order is a document a buyer sends to a seller to request goods or services. PO is short for purchase order. It lists what you want to buy, how many, and at what price.

The buyer creates the PO first and sends it to the vendor. The vendor then reviews the request and decides whether to accept it. Once the seller accepts, the purchase order becomes a binding agreement between both parties.

In simple terms, the PO meaning comes down to a clear, written request to buy. It sets expectations before any money changes hands.

Why small businesses use purchase orders

Purchase orders bring order to buying. They help you stay in control of spending and keep a clean record of every deal. Here are the main reasons small businesses rely on them:

• Spend control: You approve the cost before money leaves your account.

• A clear paper trail: You have written proof if a dispute or audit comes up.

• Order tracking: You can follow each order from request to delivery.

• Easier invoice matching: You can check the invoice against the PO with less back and forth.

That paper trail also supports the business records the IRS expects you to keep for your income and expenses.

Do you need a PO for every purchase? No. Use one when an order is large, recurring, shared across a team, or needs approval. Skip it for small, one-off buys from a trusted vendor. Purchase orders also support a healthy procurement process as your buying grows.

Purchase order vs invoice

People often mix these up, but they serve different roles. The purchase order comes first, and the invoice comes later.

The buyer creates the purchase order before the order ships. It says what the buyer wants to buy. The seller creates the invoice after delivery to request payment. It says what the buyer now owes.

Both documents share a purchase order number. That number links the PO to its matching invoice. It makes the purchase order vs invoice comparison easy to track. It also helps your accounts payable team match the two.

Types of purchase orders

Not all purchase orders work the same way. The four types of purchase orders below suit different buying needs.

What a purchase order includes

A good purchase order leaves no room for guesswork. It spells out every detail both sides need. Here’s what most purchase orders include:

• PO number: A unique code that identifies the order.

• Buyer and seller details: The names, addresses, and contacts for both parties.

• Item descriptions: A clear rundown of the goods or services.

• Quantities: How many of each item you want.

• Prices: The agreed cost per item and the total.

• Delivery details: The shipping address and the expected date.

• Payment terms: When and how you’ll pay the vendor.

Purchase order example: A bakery orders 20 bags of flour at $12 each, for a total of $240. The PO lists the bakery and supplier details, the PO number, the quantity, the unit price, a delivery date, and net 30 payment terms. The supplier accepts the PO, delivers the flour, then sends an invoice that references the same PO number.

How to create a purchase order

You don’t need fancy tools to start. A simple purchase order template in a spreadsheet or document works fine at first. Follow these steps to create one:

1. Open a purchase order template in a spreadsheet or a document.

2. Fill in the required fields, including the PO number, items, quantities, and prices.

3. Add the delivery details and your payment terms.

4. Send the PO to your vendor for acceptance.

5. Track the order and match it against the invoice when it arrives.

This manual approach handles the purchase order process well when volumes are low. As you grow, that can change. When you’re managing many orders or juggling several vendors, it may be time to move to purchase order software. The right tool automates the busywork and helps you manage your business finances as you scale. It also pairs well with three-way matching once your process matures.

Simplify purchasing and payments with Melio

Once you have a purchase order process in place, the next step is paying your vendors without the busywork. Melio lets you schedule and track bill payments in one place. That way, you keep control of cash flow while your team stays focused on the business.

A smooth invoice approval workflow connects your purchasing to your paying, from the first PO to the final payment. Ready to make vendor payments simpler? Sign up for Melio.

Purchase order FAQs

Here are answers to some frequently asked questions about purchase orders.