How to Process a Purchase Order For Your Business

A purchase order (PO) serves as a formal document issued by a buyer to a seller, committing to a purchase of goods or services. It outlines the specific items, quantities, agreed-upon prices, and delivery terms, creating a clear record of the transaction. For businesses, understanding the purchase order process helps formalize spending, track expenditures, and maintain robust financial controls. This structured approach helps prevent unauthorized purchases and ensures accurate financial reporting.

Key Information for a Purchase Order

Before a purchase order can be created, gathering specific details ensures its accuracy and completeness. This includes comprehensive supplier information, such as their legal name, billing address, and contact details, necessary for communication and tax reporting. The PO also requires details about the requesting department or individual within your organization for internal accountability and budget allocation.

An itemized list of goods or services is fundamental, specifying descriptions, quantities, and the agreed-upon unit prices for each line item. This prevents misunderstandings and aids in calculating the total cost, including sales tax. Delivery instructions, including the desired delivery date and shipping address, ensure the timely receipt of items at the correct location.

Payment terms, such as “Net 30” which means payment is due 30 days after the invoice date, or “2/10 Net 30” offering a 2% discount if paid within 10 days, must be clearly stated. A unique purchase order number is assigned to each document for tracking and maintaining an audit trail. Finally, specific terms and conditions, like warranty details or return policies, govern the business relationship.

Creating and Approving the Purchase Order

Once all necessary information is collected, the next step involves generating the purchase order document itself. Many businesses utilize dedicated accounting or procurement software, such as QuickBooks, SAP, or Oracle NetSuite, to populate and manage POs, ensuring consistent formatting. Smaller businesses might use standardized templates or manual forms, meticulously entering each detail. This structured data entry helps minimize errors and streamlines the procurement cycle.

After drafting, the purchase order enters an internal approval workflow to authorize the expenditure. The approval hierarchy often depends on the total value of the purchase, with larger expenditures requiring higher-level approval. This multi-level review process ensures budget adherence and proper governance.

Formalizing the purchase order with an official signature, whether physical or digital, signifies internal commitment to the purchase. This approval transforms the request into an authorized document for the supplier. The signed PO acts as an internal record of approval, linking the expenditure to responsible parties and their budgets.

Supplier Interaction and Order Fulfillment

With the purchase order internally approved, it is then transmitted to the supplier to initiate the order. This communication occurs via email, through a dedicated supplier online portal, or secure electronic data interchange (EDI) systems, depending on the supplier’s preferences and the existing business relationship.

Upon receiving the purchase order, the supplier provides an acknowledgment or order confirmation. This document serves as the supplier’s agreement to fulfill the order according to the specified terms and references the purchase order number for tracking. Open communication allows for tracking order status and addressing potential delays.

The process of receiving goods or services involves a careful internal verification step. When items arrive, a “receiving report” or “goods receipt” document is generated, detailing the quantity and condition of the received items. Any discrepancies must be noted immediately for resolution with the supplier.

Invoice Reconciliation and Payment Authorization

After goods or services are received, the supplier issues an invoice, which then triggers the “three-way match” process. This procedure involves comparing three documents: the supplier’s invoice, the original purchase order, and the receiving report. The objective is to verify that billed items match what was ordered and received.

First, the invoice is compared against the purchase order to confirm that prices, quantities, and payment terms align with the initial agreement. Next, the invoice is cross-referenced with the receiving report to ensure that only items physically received and accounted for are being billed.

Any discrepancies identified during this reconciliation must be promptly investigated and resolved with the supplier. This might involve issuing a debit memo or requesting a credit. Only after a successful three-way match and the resolution of all discrepancies is the invoice authorized for payment, ensuring accurate financial disbursement and preventing overpayments.

Completing the Purchase Order Record

The final administrative step in the purchase order process involves formally closing out the PO in the accounting or procurement system. This update changes the PO status to “closed” or “completed,” indicating all associated transactions are finalized. Closing the PO helps prevent duplicate orders or payments and maintains procurement record integrity.

All related documents, including the original purchase order, the supplier’s invoice, the receiving report, and proof of payment, are then compiled and archived. This documentation supports an audit trail for financial transactions. Businesses retain these records for several years, aligning with IRS requirements for tax purposes.

Maintaining these records is invaluable for future business operations. They provide historical data for budgeting, enable analysis of past spending patterns, and support future negotiations with suppliers. A well-maintained purchase order record ensures compliance, financial transparency, and operational efficiency.