Business Glossary

What is a purchase order?

This article is for educational purposes and does not constitute financial, legal, or tax advice. For specific advice applicable to your business, please contact a professional.

A purchase order (PO) is a legal document sent by a buyer to their supplier. It demonstrates their commitment to pay for specific products and/or services from a seller, and establishes terms for payment.

A PO communicates the buyer’s needs to the seller, and establishes their expectations for the transaction. Whether you’re making a capital investment or simply purchasing new items to add to your inventory, the transaction starts with a purchase order.

Purchase orders can be helpful as they simplify the buying process. The process of buying goods with a purchase order is typically as follows:

  • The buyer identifies a need for a product or service
  • A PO is issued to the seller, either electronically or by post using purchase order templates
  • The supplier receives the PO and confirms they are able to fulfil the order
  • If they can fill the order, the supplier gets to work allocating stock or personnel
  • If the order cannot be fulfilled, buyer is notified and the order is cancelled
  • Goods are shipped or services provided. A PO number is assigned so that both parties can identify the specific order
  • The seller then sends an invoice for the order, matching it to the PO number
  • The buyer pays the invoice in accordance with the terms established in the PO

Purchase order example

Now you know the definition of a purchase order – but what does an example look like?

Although a PO is a legal document, there is no specific format a purchase order form should take. Whether you use our templates or create your own form from scratch, your PO should contain the following information:

  • A unique PO number for the transaction
  • Billing and shipping addresses for the buyer
  • The supplier’s address, phone number and email address
  • Order and delivery dates
  • Names of personnel/departments that requested and approved the order
  • An itemised list of goods to be purchased (including item codes/SKU numbers and prices)
  • Payment terms
  • Any applicable discounts
  • The total value of the order (including taxes where applicable)

Advantages and disadvantages of using a purchase order

Purchase orders can simplify the ordering process, improving visibility and accuracy when managing your company’s finances. Because funds need to be available before a PO is issued, using them encourages better budgeting to manage operating cash flow.

Because they clearly set out the buyer’s expectations, they help to insulate against unpleasant surprises, and can facilitate fast and frictionless delivery of goods.

However, they can add a layer of administration that may bottleneck efficiency for smaller companies. Using a business credit card may help smaller companies to achieve the same ends more efficiently.

Managing purchase orders with Square for Retail

It’s easy to create and manage purchase orders with Square for Retail POS System. Once you’re set up, you can use them to track vendors, stock up on products and receive inventory.

To create a new purchase order with Square for Retail:

  1. From your online Square Dashboard, go to the Item tab > Inventory Management > Purchase Orders > Create Purchase Order.
  2. Enter purchase order details > click Create or Save as Draft. A maximum of 500 unique items can be added to a single Purchase Order.
  3. Check your vendor’s email address and add a note if you wish.
  4. If you would like a copy of the purchase order, select Send Me a Copy, Save as PDF or Save as CVS.

Frequently asked questions about purchase orders

Why do companies use purchase orders?

Purchase orders can be beneficial for businesses as they establish clear expectations for the transaction, and protect both the buyer and seller as they are legally binding.

What is the difference between a purchase order and an invoice?

A purchase order is sent by the buyer to request goods and establish terms for the transaction before it begins. However, an invoice is typically created by the seller to confirm that goods have been sent or services have been provided.

What is a blanket purchase order?

A blanket purchase order is an agreement between a buyer and seller for multiple deliveries over a set timeframe, for an established price. They are commonly used between businesses that have a longstanding relationship and often include discounts.

Learn more about how Square can help you manage Purchase Orders on our blog >

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