Why Do You Need a Purchase Order? Benefits, Process & Best Practices

A purchase order (PO) is needed to formally document a buyer’s request for goods or services before a purchase is completed. It typically specifies what is being purchased, the quantity, agreed price, delivery requirements, payment terms, and other conditions. Purchase orders help buyers and suppliers establish a clear record of the transaction, support spending controls, and provide documentation for receiving, invoice verification, and financial record-keeping.

Quick Answer: Why Do You Need a Purchase Order?

Businesses use purchase orders to create a clear and traceable record of an intended purchase. A PO helps communicate expectations to the supplier and gives the buyer a reference for checking whether the goods or services delivered and the supplier’s invoice correspond to the agreed purchase.

Purchase orders can help organizations:

• Define what is being purchased.
• Specify quantities and agreed prices.
• Document delivery and payment requirements.
• Control and authorize business spending.
• Provide a reference for receiving goods or services.
• Support invoice verification and accounts payable processes.
• Improve procurement record-keeping.
• Create documentation for audits and internal controls.

What Is a Purchase Order?

A purchase order is a formal document issued by a buyer to a supplier that describes the goods or services the buyer intends to purchase.

A typical purchase order may include:

• Purchase order number
• Buyer information
• Supplier information
• Item or service description
• Quantity
• Unit price
• Total purchase value
• Delivery address
• Requested delivery date
• Payment terms
• Shipping or delivery terms
• Applicable taxes or charges
• Other purchase conditions

The exact information included can vary depending on the organization, supplier relationship, industry, and purchasing requirements.

What Is the Purpose of a Purchase Order?

The primary purpose of a purchase order is to establish a documented record of what a buyer is requesting from a supplier and under what terms.

A PO can serve several purposes throughout the procurement and accounts payable lifecycle.

1. Document the Purchase

A purchase order creates a written record of the buyer’s requested goods or services. This makes it easier for procurement, finance, receiving teams, and suppliers to reference the same transaction.

2. Define Purchase Requirements

The PO specifies important details such as quantities, descriptions, prices, delivery requirements, and payment terms. Clear specifications can reduce misunderstandings about what was ordered.

3. Control Business Spending

Organizations can use purchase orders as part of their internal approval and spending-control processes. Depending on company policy, purchases may require authorization before an order is sent to a supplier.

4. Support Invoice Verification

Purchase orders can provide a reference for accounts payable when reviewing supplier invoices. Finance teams can compare information on the invoice with the purchase order and, where applicable, receiving documentation.

5. Improve Record-Keeping

POs create documentation that can be stored with other procurement and financial records. This can make it easier to trace purchases and review transactions later.

6. Support Internal Controls and Audits

Organizations can use purchase orders as part of procurement controls and audit documentation. A PO can help establish who requested or authorized a purchase and what was agreed with the supplier.

Why Are Purchase Orders Important?

Purchase orders are important because they create structure and visibility around business purchases. Without a documented purchasing process, organizations may have difficulty determining what was ordered, who authorized it, what price was agreed upon, and whether the supplier invoice corresponds to the original request.

How Does the Purchase Order Process Work?

A typical purchase order process follows these steps:

1. Identify the purchasing need: A department determines that goods or services are required.
2. Create a purchase requisition: The request is documented according to the organization’s procurement process.
3. Obtain approval: The purchase is reviewed and approved according to applicable spending policies.
4. Create the purchase order: Procurement or an authorized employee creates the PO with the relevant purchase details.
5. Send the PO to the supplier: The purchase order is communicated to the supplier.
6. Supplier fulfills the order: The supplier provides the requested goods or services.
7. Receive and verify: The organization confirms what was delivered or completed.
8. Process the invoice: Accounts payable reviews the supplier invoice against available purchase and receiving information.
9. Make payment: Once the transaction satisfies applicable requirements, the invoice moves through the payment process.

What Happens After a Purchase Order Is Issued?

Issuing a purchase order does not necessarily mean the transaction is complete. The PO becomes a reference throughout the purchasing lifecycle.

After the PO is issued:

• The supplier receives the order.
• The supplier confirms or fulfills the order according to the agreed requirements.
• The buyer receives the goods or services.
• The receiving information is recorded where applicable.
• The supplier sends an invoice.
• Accounts payable compares relevant purchasing, receiving, and invoice information.
• Exceptions are investigated and resolved.
• The approved invoice proceeds through payment.

Purchase Order and Invoice: What Is the Difference?

A purchase order and an invoice serve different purposes in the procure-to-pay process.

What Is a Three-Way Match?

A three-way match is an accounts payable control that compares information from three documents or records:

1. Purchase order: What was ordered.
2. Receiving record: What was received.
3. Supplier invoice: What the supplier billed.

The objective is to identify whether the purchasing, receiving, and invoicing information is sufficiently consistent according to the organization’s rules before payment is processed.

For example, if a PO specifies 100 units, the receiving record shows 100 units received, and the supplier invoice bills for 100 units at the agreed price, the transaction may pass the organization’s matching rules. If the quantities or prices differ, the invoice may require exception review.

Benefits of Using Purchase Orders

Better Procurement Visibility

Purchase orders provide a documented view of planned purchases and their associated suppliers, quantities, prices, and terms.

Improved Spending Control

Organizations can incorporate approval thresholds and purchasing policies into the PO process to help control unauthorized or unexpected spending.

Clearer Supplier Communication

A PO provides suppliers with a structured reference for the buyer’s requirements, helping reduce ambiguity about the order.

Easier Invoice Verification

Purchase orders provide information that accounts payable can use when checking supplier invoices.

Better Audit Trails

PO records can help organizations trace purchases from the initial request through fulfillment, invoicing, and payment.

Improved Budget Planning

Documented purchase commitments can give finance and procurement teams better visibility into planned spending, depending on the organization’s purchasing and accounting processes.

When Do You Need a Purchase Order?

Whether a purchase order is required depends on an organization’s procurement policy, transaction type, supplier relationship, value of the purchase, and applicable contractual or regulatory requirements.

Organizations may commonly require POs for:

• Large purchases
• Recurring supplier relationships
• Capital expenditures
• Goods purchased for business operations
• Professional or contracted services
• Purchases subject to approval thresholds
• Transactions where formal procurement controls are required

Some organizations may allow certain low-value, urgent, or specific categories of purchases to follow alternative procedures.

What Happens If You Don’t Use a Purchase Order?

When an organization operates without POs where they would otherwise be useful or required, it may become harder to establish what was ordered, who authorized the purchase, what price was agreed upon, and whether an invoice corresponds to the original request.

Potential challenges can include:

• Unclear purchase requirements
• Reduced spending visibility
• Invoice discrepancies
• Approval-control gaps
• More manual investigation
• Difficulty tracing transactions
• Greater audit documentation challenges
• Supplier misunderstandings

These risks vary according to the organization’s procurement controls, systems, policies, and transaction types.

Purchase Orders in Accounts Payable Automation

Purchase orders can become particularly valuable when combined with automated accounts payable workflows.

An automated process can use purchase order data to support:

• Invoice data capture
• Purchase order matching
• Receipt matching
• Approval routing
• Exception identification
• Invoice validation
• Payment processing workflows
• Procurement reporting

This can reduce repetitive manual work while giving accounts payable teams greater visibility into invoices that require review.

Purchase Order Best Practices

• Use standardized purchase order formats.
• Assign a unique PO number to each purchase order.
• Include clear descriptions and quantities.
• Document agreed prices and relevant terms.
• Define approval requirements based on company policy.
• Maintain accurate supplier information.
• Record changes to purchase orders appropriately.
• Connect purchase orders with receiving and invoice workflows where practical.
• Monitor open and outstanding purchase orders.
• Retain purchase order records according to applicable company policies and requirements.

Frequently Asked Questions About Purchase Orders

Conclusion

A purchase order provides a structured and traceable way to document a business purchase before goods or services are delivered. By specifying what is being purchased and the applicable quantities, prices, delivery requirements, and terms, a PO can improve communication between buyers and suppliers while supporting procurement controls and accounts payable processes.

When purchase orders are connected with receiving, invoice processing, and payment workflows, they can also provide an important foundation for automated procure-to-pay processes and stronger financial visibility.