What is a purchase order? Definition, how the process works and benefits for your small business

Published Wednesday 26 November 2025

Table of contents

• What is a purchase order?
• What is a purchase order number?
• How to create a purchase order number
• How purchase orders work
• How a purchase order differs from an invoice
• Purpose of purchase orders
• Types of purchase orders
• Details to include on a purchase order
• FAQs on purchase orders
• Start using Xero for free

Key takeaways

• Implement a unique purchase order numbering system to track orders from creation to payment, either manually starting from 001 or using accounting software to automatically generate PO numbers for better organization and error reduction.

• Include essential details on every purchase order such as unique PO numbers, complete company information, specific item descriptions with quantities and prices, delivery terms, and payment conditions to prevent disputes and ensure smooth transactions.

• Recognize that purchase orders become legally binding contracts once suppliers accept them, providing protection for both parties by locking in agreed prices, delivery terms, and payment obligations.

• Utilize the three-way matching process by comparing purchase orders, packing slips, and invoices before making payments to maintain accurate financial records and control cash flow effectively.

What is a purchase order?

A purchase order (PO) is a legal document you send to a supplier to request specific goods or services. It becomes a binding contract when the supplier accepts it.

Essential PO components:

• Include a unique purchase order number for tracking
• Add your details and your supplier’s details (names, addresses, contacts)
• List the items, quantities, and prices you are ordering
• Set delivery dates, locations, and methods
• State payment terms and conditions, such as a 30-day payment window

Legal protection benefits:

• For buyers: Locks in agreed prices and delivery terms
• For suppliers: Guarantees payment obligation once goods are delivered
• Create clear documentation for dispute resolution, with some frameworks offering access to Canada’s Office of the Procurement Ombudsman for handling complaints.

Your supplier reviews your purchase order and either accepts it, rejects it, or asks for changes before moving forward.

What is a purchase order number?

Each purchase order has a unique number you use to track your order. You create this number when you place an order. Your supplier uses it on invoices and other documents. This saves you time matching orders with invoices and helps reduce errors.

How to create a purchase order number

The buyer initiates the creation of the purchase order number using one of these methods:

• A manual system using purchase order numbers starting from 1 or 001. You can use an Excel document, to track the numbering, or a purchase order template.
• Using accounting software like Xero to automatically create a PO number when a purchase order is created. This simplifies ordering and record-keeping because all documents are created and stored electronically.
• When you shop online, you can use an order management system to automatically assign a number to your order and send you a confirmation with the order number and other details.

How purchase orders work

Using a purchase order system automates your buying process from request to payment. This reduces errors and helps you control your cash flow.

The purchase order workflow:

Step 1: Order creation

• Buyer creates PO with unique number
• System captures all order details automatically

Step 2: Supplier review

• Supplier receives and reviews PO terms
• Accepts, rejects, or requests modifications

Step 3: Order fulfillment

• Supplier creates packing slip to verify items
• Ships goods with PO number referenced

Step 4: Invoice and payment

• Supplier sends invoice referencing PO number
• Buyer matches PO, packing slip, and invoice before payment

For larger businesses: Purchase requisitions add an approval layer, helping control spending and prevent unauthorized purchases.

How a purchase order differs from an invoice

Purchase orders and invoices serve different purposes in the buying process:

Purchase order (from buyer):

• Request goods or services before delivery
• Send at the start of the transaction
• Include order details, agreed prices, and delivery terms

Invoice (from seller):

• Request payment after delivery
• Send after goods or services are provided
• Include payment terms, amounts due, and payment methods

Why use both documents?Without a purchase order, disputes can arise over:

• Confirm you ordered the goods
• Confirm the agreed prices
• Confirm the requested quantities

The PO creates a paper trail that protects both parties and ensures smooth transactions.

Purpose of purchase orders

Purchase orders create structure and accountability in business transactions, benefiting both buyers and suppliers.

Benefits for buyers:

• Cost control: Lock in agreed prices before delivery
• Order accuracy: Clear specifications reduce delivery errors
• Budget management: Track spending against approved purchases
• Keep documentation for financial reviews, as required for public sector contracts over $10,000. Learn more about public sector reporting requirements.

Benefits for suppliers:

• Get a written commitment to pay upon delivery, with interest calculated if payment is late in some government contracts. Read more about late payment policies.
• Plan your inventory in advance with Xero inventory management
• Relationship building: Professional processes strengthen partnerships
• Cash flow predictability: Clear payment terms and schedules

Mutual benefits:

• Prevent disputes with documented agreements
• Reduce manual errors with automated workflows
• Make expectations clear for everyone

Types of purchase orders

There are four types of purchase orders:

• Use a standard purchase order (SPO) for a single transaction with set terms, prices, products, and delivery details
• Use a planned purchase order (PPO) for regular, large orders, such as office supplies, with full descriptions and quantities
• Use a blanket purchase order (BPO) when you buy items up to an agreed value over a set period
• Use a contract purchase order (CPO) to set terms and conditions for a large order before you release the actual purchase order

Details to include on a purchase order

Complete purchase orders prevent disputes and ensure smooth transactions. Include these essential details:

Company information:

• Buyer details: Company name, address, phone number
• Supplier details: Company name, address, phone number
• Billing and shipping addresses (if different)

Order specifications:

• Unique PO number for tracking
• Order date and estimated delivery date
• Item details: SKU numbers, descriptions, quantities, unit prices
• Delivery method and shipping terms

Financial terms:

• Subtotals and line totals for each item
• Tax charges and final total
• Payment terms: Methods accepted, due dates, discount terms

Missing information can delay orders, create billing disputes, or cause delivery problems.

FAQs on purchase orders

Here are answers to some common questions about purchase orders.

Is a purchase order a legally binding document?

Yes, once the seller accepts the purchase order, it becomes a legally binding contract. This protects both you and the supplier by clearly outlining the agreed-upon terms, price, and delivery details, reducing the risk of disputes later on.

How does a purchase order get paid?

A purchase order itself isn't a payment document. After the supplier fulfills the order, they will send you an invoice that references the PO number. You then pay the invoice according to the agreed-upon payment terms, which could be through methods like electronic funds transfer (EFT), credit card, or cheque.

When should my small business use a purchase order?

Using purchase orders is a good idea when you need to formalize your buying process, especially as your business grows. They are particularly helpful for tracking inventory, managing budgets, preventing unauthorized spending, and ensuring you and your suppliers are on the same page before an order is placed.