What Is a Purchase Order?

A purchase order (PO) is a legally binding document outlined by the buyer and presented to the seller. In other words, a purchase order is a list of things you want to buy.

It includes the order details, types of products you need, quantity, payment terms, and shipping & delivery information. Purchase orders are commonly used by small business owners when ordering products in large quantities.

A car repair shop, for example, may need to purchase different parts from a supplier and order various filters, tools, or equipment.

Here is the PO process the car repair shop would use to get the items they need:

  • The shop owner notices their inventory is low.
  • The owner creates a list laying out what they need from a supplier (the exact number of items) and how much they will pay for the goods.
  • The supplier accepts the order because they can provide those goods.
  • The supplier could also respond "no" if the product is out of stock, or if there are other issues. In this case, the purchase order is not valid. 
  • The supplier packs the goods and delivers them on the agreed due date. 
  • The supplier issues an invoice for the purchased goods. 
  • The buyer pays for them.  

It is a simple yet essential process for any small, medium, or large business.

Why Are Purchase Orders Important For Your Business?

Purchase orders give a complete analysis of what products your business provides.

At first, this might not seem necessary. Still, the history of purchase orders can determine the performance of the business and point out what changes the company should make to optimize the current process.

Purchase orders come with many benefits for businesses and business owners.

  • Help avoid duplicate orders: If one person is in charge of making purchase orders, keeping track may be simple. But, if a team of ten or more people can make orders, POs can keep control of the requests.
  • Help avoid price increases: If the supplier changes product prices between the date of order and delivery, a purchase order is here to resolve the problem. All POs serve as legal documents and clarify the agreed-upon price for both the buyer and supplier.
  • Help buyers keep track of incoming product orders: Having a well-organized order system makes it effortless to determine what products are coming. Keeping track of your incoming product orders can help you manage inventory and shipping.
  • Keep your invoices in order: When ordering similar or identical products (for the second or hundredth time), matching invoices to orders can be time-consuming without proper documentation. A purchase order number on the document avoids miscommunication and confusion.
  • Ensure clear communication: Purchase orders include all essential information of a purchase. Having every detail defined in a legal document can help a business owner avoid confusion or potential conflict with the supplier.

Purchase orders are essential for any business, from a startup to a corporation. It is the root document that regulates and controls the operation of all business activities.

How Are Purchase Orders Different From Invoices?

Because both purchase orders and invoices are legally binding documents exchanged between buyers and suppliers, it is not a surprise that these two terms are often mixed up.

They contain similar information, including a billing and shipping address, purchase order number, and other information.

However, each financial document is used at a different stage of the buying process by different people. A purchase order is created and issued by the buyer, while a supplier creates the invoices.

Here is a list of differences buyers and sellers should know:

Purchase Order

  • Created before product purchase
  • Includes all goods necessary for the business company
  • Includes payment details


  • Created after purchase
  • Confirms products delivered
  • Requires payment (by the buyer) on a specific date

The purpose of a PO is to track order status, manage payments to suppliers, and clarify misunderstandings. A purchase order informs the supplier how much product to deliver to the buyer. If appropriately maintained, your purchase order database will help you analyze everything your business buys (and, indirectly, your cost of doing business), when you need to order inventory, and when you should pay invoices.

Invoices indicate how much money the buyer owes to the supplier. They are created in response to a product order. The buyer may request an estimate before deciding if they want to proceed with a purchase. An estimate is a sneak-peek of the invoice and can be used to create an official PO.

When invoices are correctly used, they can help businesses track profits and costs and provide an official record of goods delivered.

Keeping an invoice database makes it easier for business owners to pay taxes. It will show how much revenue the business generated throughout the year and how much of that money should be taxed.

How Are Purchase Orders Different From Contracts?

A business generally uses a purchase order for a single business transaction. A contract, on the other hand, is used when a company wants to register a long-term agreement between the company and a supplier.

When doing a risky business transaction, it is better to use a contract as they have a higher value, in terms of the law. Contracts can not only reduce risk exposures, but identify responsibilities as well.

Terms and conditions are listed in both PO and contracts. The main difference is that terms and conditions are thoroughly explained in contracts. This is useful if there are complex requirements associated with a purchase.

How Are Purchase Orders Different From Requisitions?

A purchase requisition is about permission to buy a product or service. It can eventually lead to a purchase order.

The requisition process starts with a purchase request form – a document created by the buyer and submitted to the appropriate department (often the finance department) for approval. While requisitions can vary depending on the company's needs, they usually consist of the purchaser location, the number of goods requested, the supplier name, and the price. Once approved, information from the requisition is used to generate a purchase order.


Well-defined purchasing processes and documents help clarify inventory management and costs, as well as protect both the buyer and supplier.

However, many companies avoid using purchase orders, contracts, and requisitions because they don't want to bother themselves with extra paperwork. An automated purchasing system can streamline the process, remove the need for paper-based ordering, and increase efficiency and productivity.