What are Purchase Orders?

A purchase order (PO) is an official document issued by a buyer committing to pay the seller for the supply of specific goods or services to be delivered in the future. This document forms the first stage in the accounts payable process, detailing the types, quantities, and agreed prices for products or services. Employed to streamline buying processes and enhance financial control, purchase orders help organisations manage their spending more effectively. Confusion often arises between purchase requisitions and purchase orders; however, as we will see in the process below, these are two distinct, sequential steps in the procurement process. 

The Process

1. Raise a Purchase Request

The process begins with somebody in an organisation identifying a need to make a purchase, either for physical goods, a service, or a software product. For instance, a company has 25 new employees joining soon and HR needs to buy laptops for the new joiners. The request  would detail the supplier, the description of the items (e.g., laptop model), quantity needed, and the price per unit, as well as any custom fields that a company chooses e.g. which office is the purchase for? Which department of the company?

2. Approve Purchase Request

The next step involves the approval of the purchase request. Approvers in the workflow might include line managers, department heads, or members of the finance team who will evaluate the necessity and justification of the request. They can approve, reject, or request additional details to better understand the proposed expenditure. Beware- this step is a hotspot for bottlenecks and delays in the process!

3. Generate PO

Once the purchase request receives approval, a purchase order is generated. This step has evolved from manually filling out paperwork to automated systems that pull data directly from the approved purchase request. This automation ensures accuracy and efficiency, transforming the request into a formal document that is sent to the supplier.

4. PO Approval from Supplier

Upon receipt of the purchase order, the supplier reviews the terms and confirms their ability to meet the order as specified. This confirmation might include verification of item availability, delivery dates, and price agreement, ensuring that both parties are aligned before moving forward.

Now that we've covered the essential steps involved directly with purchase orders, let's continue to explore the subsequent invoice management process to understand it in the broader context of the procure-to-pay cycle. 

5. Goods Received

Once the supplier dispatches the goods, the buyer's responsibility is to ensure that the items received match what was ordered. This is particularly crucial in environments like retail, where managing large inventories is common. Receiving reports are often used to document the receipt of goods, verifying that the actual items align with the purchase order specifications.

6. Invoice Received from Supplier

Following the delivery of goods or services, the supplier will issue an invoice to the buyer. This invoice should reflect the terms agreed upon in the purchase order, detailing the quantities delivered, unit prices, total cost, and payment terms.

7. Matching - 2 or -3 Way

Invoice matching is critical to ensure that the transactions are accurate and valid. This process can be a two-way match between the purchase order and the invoice or a three-way match that also includes the receiving report. This step helps prevent discrepancies and ensures that only authorised purchases are paid for.

8. Approval

Before proceeding with payment, the invoice undergoes an approval process. Similar to the purchase request, this involves an internal workflow where the invoice is reviewed and approved by the appropriate stakeholders. This step is crucial to ensure that all financial commitments are authorised and recorded correctly.

9. Payment

The final step in the purchase order process is the payment of the invoice. Payment can be made as a standalone transaction or as part of a scheduled payment run, depending on the company's accounting practices. It is essential that payments are processed within the agreed terms to maintain a good supplier relationship and financial health.

The Bottom Line

Understanding the purchase order process is fundamental to controlling organisational spend, preventing unauthorised expenditures, and maintaining visibility over financial commitments. This process not only supports efficient financial management but also establishes a clear audit trail from the initial request to the final payment, safeguarding the company's resources and financial integrity.

The full P2P process infographic: