A Comprehensive Guide to Purchase Orders

Managing purchases is a big part of running a business. But it can also get confusing without the right tools. That’s where purchase orders come in. According to a recent study, 89% of Singaporean executives and finance professionals dedicate a substantial portion of their working hours to manual tasks.

 A purchase order, often called a PO, is a document that helps buyers and sellers stay on the same page. It shows exactly what is being ordered, how much it costs, and when it will be delivered. Think of it as a contract that keeps everything clear and organised.

 In this article, we’ll cover everything you need to know about purchase orders. From understanding how they work to learning how they compare to other documents like invoices and quotations, we’ve got you covered.

What is a purchase order?

A purchase order (PO) is a formal document that a buyer issues to a seller, specifying what they intend to purchase, in what quantity, and at what price. It’s essentially a contract that outlines all the details of the order, such as delivery dates, payment terms, and item descriptions.

This document plays a crucial role in managing the procure-to-pay process, ensuring clear communication between the buyer and vendor while reducing the risk of errors. In business transactions, purchase orders also provide legal protection by serving as proof of the agreed terms.

Purchase order vs invoice

A purchase order and an invoice are both vital documents in business transactions, but they serve distinct purposes. A purchase order is created by the buyer to confirm what they are ordering, detailing quantities, prices, and terms. On the other hand, an invoice is issued by the seller to request payment for goods or services provided, typically after the order has been fulfilled. Think of the purchase order as the beginning of the transaction, focusing on communication and commitment, while the invoice marks the conclusion, finalising the financial aspect of the deal. Together, they ensure clarity, accuracy, and accountability in the procurement process.

Purchase requisition vs purchase order

A purchase requisition is an internal document used within an organisation to request approval for a purchase. It is typically created by employees who need specific items or services, acting as a formal request for procurement. Once the purchase requisition is reviewed and approved by the appropriate department, it is then converted into a purchase order, which is sent to the vendor to confirm the purchase. In simple terms, the purchase requisition is the first step in the process, ensuring internal approval before moving forward with an official order.

Sales order vs purchase order

A sales order is a document created by the seller in response to a purchase order from the buyer. While the purchase order is issued by the buyer to outline what they want to purchase, the sales order is created by the seller to confirm what they will deliver based on the details in the purchase order. These two documents work together, reflecting each other to ensure accuracy and alignment throughout the transaction. This mirroring helps both parties stay on the same page, reducing errors and maintaining a smooth procurement process.

Purchase order vs quotation

A quotation is a non-binding estimate provided by a seller that outlines the cost of goods or services. It is typically requested by buyers before issuing a purchase order, allowing them to compare pricing and terms from different vendors. Once a vendor is selected, a purchase order is issued to confirm the order and solidify the agreement. By using quotations in the early stages, businesses can make informed decisions and ensure they choose the best option before committing to a purchase.

Blanket order vs purchase order

A blanket order is a long-term agreement between a buyer and a vendor, designed for purchasing specific goods repeatedly over time. Unlike a purchase order, which is typically used for one-time or unique purchases, a blanket order simplifies procurement for recurring needs. By eliminating the need to create multiple purchase orders for the same items, blanket orders streamline the process and improve efficiency, saving time and reducing administrative work for both the buyer and the vendor. Additionally, blanket orders are often used to secure fixed pricing over a specific period, offering protection against fluctuating market prices.

Purchase order process

The purchase order process involves several key steps:

Step 1: Identify the need

The buyer begins by thoroughly assessing and determining the specific items or services that are necessary for the business. This involves evaluating current inventory levels, understanding upcoming project requirements, and considering any strategic goals or budgetary constraints. The buyer may consult with various departments to gather input and ensure that the identified needs align with the overall objectives of the organisation. This step is crucial as it sets the foundation for the entire procurement process, ensuring that resources are allocated efficiently and effectively to meet the company's operational demands.

Step 2: Create a purchase requisition 

This step involves drafting a formal request within the organisation to procure specific goods or services. The purchase requisition is typically initiated by an employee or department that identifies a need for certain items. Once the requisition is created, it is submitted for internal review and approval. This process ensures that the proposed purchase aligns with the organisation's budgetary constraints and strategic goals. Approval is usually required from relevant departments, such as finance or management, to verify that the purchase is necessary and funds are available. 

Step 3: Generate a purchase order

Once the purchase requisition has been thoroughly reviewed and approved by the necessary departments, it is then transformed into a formal purchase order (PO). This step involves accurately translating the details from the requisition into the PO format, ensuring that all specifications such as item descriptions, quantities, agreed prices, delivery dates, and payment terms are clearly outlined. The creation of the purchase order is a critical phase in the procurement process, as it serves as the official document that will be sent to the vendor, confirming the buyer's intent to purchase and establishing the terms of the transaction. This meticulous conversion process helps maintain consistency and clarity, reducing the likelihood of misunderstandings or errors in the subsequent stages of the procurement cycle.

Step 3: Send to vendor

After the purchase order is carefully prepared and verified, it is sent to the vendor for confirmation. This step is vital as it starts formal communication, ensuring the vendor understands the buyer's needs. The vendor checks the order to confirm they can meet the specified quantities, prices, and delivery timelines. This confirmation ensures mutual agreement, reducing the risk of errors. Once the vendor accepts the terms, the procurement process can continue smoothly towards delivery and invoicing.

Step 4: Receive goods and invoice

After the vendor confirms the purchase order and prepares the items, they deliver them to the buyer's specified location. This involves careful packaging and transport to ensure the items arrive in perfect condition and meet expectations. Upon delivery, the vendor issues an invoice detailing the items, quantities, and agreed prices, serving as a formal payment request. This step is vital for transparency and accountability, allowing the buyer to verify that the goods match the purchase order before making payment.

Step 5: Reconcile and approve payment 

This vital step involves a detailed review and verification process, ensuring the purchase order, invoice, and delivery receipt are accurately matched before payment. The process starts by comparing the PO with the invoice to identify any discrepancies in quantities, prices, or terms. The delivery receipt is also checked to confirm that the received goods or services match the order and invoice. This thorough matching process is crucial to prevent errors, avoid overpayments, and ensure the company only pays for what has been correctly delivered and agreed upon. Once all documents are consistent and any issues resolved, payment is approved, ensuring a smooth and transparent financial transaction. This step protects the company's financial resources and strengthens vendor relationships by demonstrating a commitment to accuracy and accountability.

How Summit simplifies purchase orders and vendor invoice management

At Summit, we understand the challenges finance teams face with purchase orders and vendor invoice management. Our solutions help businesses streamline the entire procure-to-pay process, ensuring efficiency, accuracy, and better financial control.

Summit’s tools offer:

• Smart Data Capture: Reduce manual tasks and error. Invoices are not only scanned and recorded, but also auto-categorised, budget-assigned and compliance-checked.a
• 3-way matching: Seamlessly match purchase orders with invoices and delivery receipts for accurate reconciliation.
• Customised workflows: Tailor approval processes to your business needs.
• Accounting Integration: Summit integrates with popular accounting software, including Xero, Quickbooks and NetSuite for seamless month-end closing.

Ready to simplify your procurement process? Talk to us today to learn more about how Summit can support your team!