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A Beginner’s Guide to Purchase Orders: Examples & Tips

A purchase order sets the terms of a purchase between a buyer and seller. Learn about the different types and what you should expect to see in a PO.

Just when you think you understand everything about the retail and wholesale business, you find out you don't know what a purchase order is.

It's more confusing when you find out there are differences between the types of purchase orders you can complete or receive. There's no need to panic, though; we'll help you get this right.

We'll start by explaining the basics, like what a purchase order is. Then, we'll go over how it works. After that, you need to know the difference between a purchase order and an invoice.

It's also wise to decide if purchase orders are right for you as either a buyer or a seller. That's up to you. It's not for everyone because it can mess up inventories if customers don't pay or if sellers don't supply when they should. Still, it serves many retailers, wholesalers, and households well if done right.

What is a purchase order, and how does it work?

A purchase order is a legally binding contract between a buyer and seller. After a buyer creates an order, and the seller (vendor) confirms the order, the buyer is responsible for paying for the goods or services specified. The buyer must pay the invoice on the date that the seller specifies and the buyer agrees.

A purchase order provides the buyer time to review the order. It also gives the vendor time to finalize the price before shipping it to the buyer. However, the primary purpose of a purchase order is to formalize the contract between the buyer and vendor.

Sometimes, changes may occur in an order. For instance, the vendor might decide to offer a discount or charge more. A buyer may decide to add more items to a current order or see if they can negotiate a change in the order if it can't be outright canceled.

Typically, a purchase order happens between a business and a wholesale supplier. However, it also could happen between households and a company that offers bulk goods for individual sale. Many legal issues surround the concept of purchase orders. Even more stringent policies limit who can involve themselves in wholesale supply chain management.

Purchase orders aren't always offered, either. Many wholesalers require payment in advance. However, when the option to pay for wholesale items after ordering and receiving is available, it's best to understand the ordering basics.

Purchase order vs. invoice

Some buyers think they’ve been sent an invoice when it’s sometimes just a copy of a purchase order. A purchase order is not an invoice, and the seller typically still needs to send the invoice at this point.

A purchase order is what a buyer fills out when making a request to a vendor. The vendor views the purchase order when fulfilling orders.

After the buyer receives the order, the vendor then sends an invoice. The invoice is what a buyer views to find out what they owe to a vendor.

The basics of purchase orders

When you're ready to view and manage orders, it’s important not to miss any information.

You’ll usually see the name of a person if it’s a consumer order. If it’s a business order, you’ll see the company name printed on the invoice.

Other information you can expect to see on most purchase orders is contact information, like phone numbers, email addresses, and shipping addresses.

Purchase orders can also have the shipping method and delivery date.

Purchase orders will also include a product description, quantity, unit prices, total price, and shipping costs.

How the purchase order creation process works

The purchasing process between a buyer and a seller varies. However, it typically includes these basic steps but not always in this exact chronological sequence.

For instance, a salesperson may decide to allow a customer to review the order to make sure it's correct. They don’t always require payment right away if the order is wrong. However, the seller may put a delivery on hold if the buyer doesn’t pay right away.

The fact that an order mistake has occurred also doesn’t nullify the buyer’s responsibility to pay. The only authority for that would be if the seller has determined that they can’t fill the order. In that case, both the buyer and the seller can agree to cancel the order, but that may be up to the vendor's discretion.

1. Customer creates the order

This step in the purchase order process usually applies to a shop that wants to have wholesale products delivered to a store. However, it could apply to an individual who has become a wholesale buyer to save money on household products. Either way, the customer creates the order.

2. Supplier checkers inventory

The supplier checks to see if they have the items the customer ordered in stock. If they do, they accept the order and get ready to fill it.

3. Supplier fills the order

At this point, the order is filled and the supplier prepares it for delivery. The target goal is to ship the items by the due date to the seller.

4. Customer receives order from supplier

After checking that the order is complete, the supplier sends the order to the customer. This provides the customer with a chance to review the order when received. If a mistake is found, then it might be time to troubleshoot the order process that took place.

5. Supplier sends an invoice

Soon after the customer receives an order, the supplier sends an invoice. At this point, the customer and supplier have agreed on when the balance of that bill is due.

Types of purchase orders

Depending on the type of order, you might find yourself with a specific purchase order. Purchase orders can vary, but there are 4 main types you should know about.

1. Standard

The standard purchase order (PO) is usually used for infrequent buyer requests. It’s not usually an item that a shop or an individual needs all the time. It’s not that consistent. A PO typically includes the listing, quantity, price, and the delivery date and location of an item.

A standard purchase order is often used for times when an office worker needs to only order a small number of office supplies. For instance, they may want sticky notes or paper clips. They might need approval for this order, or perhaps for receipt papers and other office supplies, and they want to order but need approval from management.

2. Planned

A planned purchase order (PPO) typically states all details about an order except the date and location of delivery. The quantity and name of the item, along with prices, are usually shown on a PPO.

A PPO usually occurs when a company regularly orders a set amount of items. However, they might still want to confirm they need those items before following through with that purchase. It’s more about “when” the order will be delivered than “if” the order is delivered.

3. Blanket

Also known as a standing order, a blanket purchase order (BPO) doesn’t show the quantity of items in a purchase order. Sometimes, the price is also hidden. The only detail you will usually see is the item name.

The agreement worked out between the buyer and seller is also on a blanket purchase order. This purchase order type suits businesses that regularly order the same items week after week. One BPO purchase order example is a cleaning company routinely ordering the same janitorial supplies, but the amount varies.

4. Contract

A contract purchase order is usually used to establish a legally binding agreement between a buyer and a seller. It doesn’t usually show the item orders or their quantity. It also usually doesn’t show the price of the items requested by the buyer.

A consumer would typically want a contract purchase order. They might want their personal information kept private. However, they want the people in the shipping and receiving department to know what they ordered. A business may also want it this way as well when ordering confidential, classified supplies.

Purchase order tips

For buyers, it's always important to ensure the utmost accuracy when filling out a purchase order. Otherwise, this can delay shipment if you look at a copy of your order and find out it’s wrong. You also still have to at least pay for the items you did receive because it is a binding agreement.

For sellers, specify the payment terms honestly to a buyer. Don’t make them pay for what they didn’t order. However, you also can make sure you solidify an agreement with the buyer that states that the buyer is at least responsible for the parts of the ecommerce orders that were fulfilled.

Both buyers and sellers also should consider automating as much of the order process as possible. This will prevent costly mistakes and failed fulfillment.

For instance, both buyers and sellers can create automated order notifications. It's also possible to set up ecommerce solutions that allow both buyers and sellers, whether wholesale or retail, to manage and view the orders they place and receive.

In some cases, it's even recommended that you have an attorney to help you understand the terms of a purchase order. This could save you if you don't realize that a seller has made it difficult for you to understand the terms of your agreement.

For instance, vendors might fail to tell you that you don't have any right to cancel a binding order, but they do. Watch out and protect yourself. Vendors have rights too. They have the right to cancel orders they can't fulfill, whether the buyer wants to cancel the order or not.

Creating your purchase order system

There's no easy way to create your purchase order system, but automation can smooth out the process. However, you shouldn't use just any software for this purpose.

You must make sure you trust your software purchase order. Learn more about how you can safely and securely process all your B2B and B2C orders today.

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