What Is a Purchase Order? Examples, Types, and Tips

You’ve spent months working on a deal, and you finally got to “yes.” Now what? Too many deals stall out in the gap between the handshake and final details because the next steps aren’t clear. This is where a purchase order (PO) can turn a conversation into a commitment. Let’s take a look at what purchase orders are, how to create them, and the different types to consider for your business.

A purchase order is a formal document that details what a buyer intends to buy from a seller. Once accepted by the seller, it’s a legally binding agreement. The PO typically includes contact details for both the buyer and seller, the product or services being purchased, the price, and the delivery terms. These details clarify the sales deal before it’s finalized and closed. Corporate buyers often use purchase orders to track large orders.

A PO confirms that the buyer has an intent to purchase products or services from the seller and is issued before delivery. An invoice is sent after delivery by the seller as a formal request for payment. A purchase order is a legally binding document, while an invoice is a financial record of the sale.

Each document also has a different purpose. The PO is sent before delivery, so the focus is often on the terms of the order, such as quantity, specific products, and delivery date. Because the invoice is after delivery, the focus is on the payment terms instead of the order terms. However, both documents include the price and should be the same for both documents.

The buyer creates the purchase order as a formal offer to buy, signs it, and sends it to the sales representative for the seller to sign. When signed, it becomes legally binding. The PO is typically issued at the end of the sales process but before delivery. It usually comes from the buyer’s finance, procurement, or purchasing department rather than the individual customer. With a recurring order or service agreement, a PO can cover multiple products or months of service.

The details of a sale are often complicated. A purchase order communicates the terms, conditions, and stipulations of the deal. Additionally, sellers use a PO to help manage inventory, initiate business orders, provide an audit trail, and protect the seller if the buyer doesn't pay. After receiving a PO, the seller uses the document to create a sales order, which is an internal document for record-keeping and order fulfillment. By using both types of documents, sellers and buyers can ensure all parties, both internal and external, are on the same page about terms.

The seller gets several benefits when a buyer provides a purchase order. These include:

Because the PO defines all details of the sale — including specifics regarding products and services, payment amount, and payment terms — both parties have a record of the deal. A well-written PO can help resolve disputes by outlining exactly what both parties have agreed upon.

Fulfillment errors, such as shipping the wrong product or quantity, can arise from miscommunications between the buyer and seller. A properly completed PO can specify details like SKUs, detailed descriptions, amounts, and prices. The seller can use it to verify accuracy before delivering the product or service. Minimized errors and enhanced visibility can help you strengthen revenue lifecycle management.

Organizations that use POs have a clear paper trail of the deal, which can serve as an audit trail using sales performance management software. The PO can also be used for tax and compliance reporting as well as inventory auditing. Using AI sales agent software can help with the PO auditing process.

Purchase order templates can be designed to fit the type of sale, whether it's a specific one-time purchase or certain details are to be filled in later. Here are four common types of POs:

This type of PO details a single sale and is also often referred to as a standard purchase order. For example, a company purchases computer hardware for its data center and uses single-use POs to detail the purchase. This type includes the details of the purchase, including quantity, price, and delivery.

Planned purchase POs are similar to the single-use purchase order, except that they include multiple orders instead of just one. For example, if you're delivering office supplies of a specific amount and type to a company every month during the year, then the buyer will likely create a planned purchase order. One of the biggest benefits of this type of purchase order is that it locks in ‌prices and eliminates the need for multiple single-use purchase orders.

A contract PO locks in the prices while allowing flexibility in delivery and ordering. For example, if the company ordering office supplies wanted to order monthly but needed flexibility in the type of supplies and quantities, they could use a contract PO to set the prices and overall amount.

Sales that involve products or services of an unknown quantity over an extended period often use a blanket PO to keep track of the amount spent. For example, a cybersecurity professional may use a blanket purchase order to cover consultations throughout the year. Because the purchase order is ongoing, it's important to specify the time frame that it is valid. Blanket POs typically also have a release clause that details how either party can cancel the order, such as the time frame required or any penalties.

Despite the types of POs and the level of detail they may have, most purchase orders cover the basics — points of contact, what's been ordered, and the payment terms. Here are some details:

• Seller and buyer information: The top section of a PO should identify the buyer and seller with their company names and addresses, along with a specific contact person for each and their details. Clarifying who's involved in the sale is important, particularly if the vendor works with multiple people at an organization. Since the PO is a legally binding contract, this section is essential for enforceability if issues arise.
• Product/service information: The PO must include what the buyer expects to receive. The more detail, the better. Outlining the exact products or services — like "50 black chairs, SKU #123456" or "1 hour legal consulting by senior counsel" — lets both parties know what's agreed upon and can be useful in a dispute or audit. It can also simplify matching the invoice with the appropriate purchase order.
• Payment information: Including payment details in a PO can help reduce disputes and confusion later. For example, the PO may specify a Net 30 or Net 60. It can also clarify acceptable payment methods, due dates, and any late fees. Clear payment information can provide an audit trail and minimize compliance risks.

It doesn’t have to be complicated to handle purchase orders. A customer relationship management (CRM) tool can help the buyer create and manage their POs in a single place.

Follow these steps to create a purchase order:

1. Review the sales information, especially terms and quotes.
2. Determine which purchase order template to use.
3. Draft the purchase order using clear and concise language. Keep the document to 1 to 2 pages.
4. Include links to terms of service and other documents, but don't attach them. Because the terms are often lengthy and complex, they make the purchase order feel more complex. You want the purchase order to be as short, simple, and clear as possible.
5. Send copies of the purchase order to stakeholders, such as finance and legal.
6. Make any changes.
7. Send it to the seller contact for a signature.