What is Purchase Order (PO)?
A formal document issued by a buyer to a seller that specifies the goods or services to be purchased, quantities, agreed prices, and delivery terms.
Detailed Explanation
A purchase order is a legally binding commercial document that authorises a purchase and creates a contractual obligation between the buyer and seller. It typically includes the buyer's details, supplier details, PO number, item descriptions, quantities, unit prices, total amounts, delivery requirements, payment terms, and any special conditions. Purchase orders serve multiple purposes: they control spending (by requiring approval before commitment), provide an audit trail (documenting what was ordered, by whom, and at what price), enable three-way matching (PO vs. delivery receipt vs. invoice), and protect both parties by clearly documenting agreed terms. A disciplined PO process is fundamental to financial control.
Why It Matters
Without purchase orders, businesses lose control of spending. Verbal agreements lead to disputes over price and quantity, unauthorised purchases go undetected, and there is no basis for verifying that supplier invoices are correct. A PO process provides the financial controls that protect your bottom line.
Example
A facilities management company implements a mandatory PO process for all purchases over $500. Each PO requires manager approval, and invoices are only paid when they match an approved PO. In the first quarter, they identify $25,000 in invoices that do not match any PO — including charges for services that were never authorised. The PO process pays for itself many times over.
Related Terms
The money a business owes to its suppliers and vendors for goods and services received but not yet paid for.
The end-to-end workflow of receiving, validating, approving, and paying supplier invoices accurately and on time.
The systems and processes used to control, track, and reimburse business expenses incurred by employees.
Need Help With Your Operations?
Our team specialises in building the systems, SOPs, and processes your business needs to run without you.