Purchase Order Definition
Purchase orders or POs are buyer-generated documents issued to a seller, used to authorize a transaction and control the purchase of products and services from an external supplier or vendor. A purchase order can include terms regarding types, quantities, prices, discounts, payment terms, date of performance or shipment, and always identifies a specific seller.
A purchase order is an official communication of an order, but does not initiate a contract between buyer a seller. Once a seller accepts a PO, the contract between buyer and seller forms. Purchase orders allow buyers to explicitly confirm their intentions to sellers, as well as help a purchasing agent manage incoming and pending orders. POs also protect sellers in case of a buyer’s refusal to pay for goods or services. The PO is then used by accounts payable to verify accountability for an invoice sent by the seller (PO match).
Purchase orders are used by organizations to procure materials for direct consumption or for stock, procure goods and services, cover customer requirements when using outside resources, or to procure material that is needed from an internal source.
Purchase orders are vital to controlling business purchases, and protect both buyer’s and seller’s interests during a transaction. Without a PO detailing specific order or service requirements, it can be hard to determine where and when a request went wrong. Organizations use purchase orders to:
- Set clear expectations between buyers and sellers
- Organize incoming orders and manage inventory
- Determine budgets and financial costs
- Protect themselves if a legal dispute arises
- Support audits as a key source of truth
“PO-based invoices now represent 52.8% of invoices handled by the companies that responded to the 2013 AP Automation Study published by the Institute of Financial Operations (IFO). The IFO study also reported PO-based vendor invoices represent 58.9% of the invoices handled by companies with more than $5 billion in annual revenue. Among companies with less than $250 million in annual revenue, PO-based vendor invoices represent 43.4% of their invoices.”
“72.6% of respondents said that PO automation is an important component of an AP automation initiative. A whopping 87.5% of respondents from companies with more than $5 billion in revenue said PO automation is an important component of an AP automation initiative. 70% of respondents from companies with less than $250 million in annual revenues said PO automation is an important part of an AP automation initiative.”