If your clients include mid-sized to large businesses, chances are, at one point or another, they’ve sent you a purchase order (PO), a legally binding document that’s tracked with a PO number.
Purchase orders and their unique reference numbers (PO numbers) might seem a bit confusing at first. But they can actually make the transaction easier for both the seller and the buyer.
So, What Is a Purchase Order?
A purchase order is a written sales document drawn up by the buyer that tells the seller:
- The products/services the buyer wants
- Date of purchase
- Delivery date
- Shipping terms
- Payment terms and date
- Other conditions
Every purchase order comes with a unique number known as a PO number. This PO number helps the buyer reference shipments to purchases.
If some of your customers order the same products or services from you repeatedly, they might create a “standing purchase order” (also known as a “blanket purchase order.”) A standing PO lets customers buy the same products or services from you over a specified period of time using the same PO number.
What Should You Do If You Receive a Purchase Order?
When you receive a purchase order, you should first check whether you can deliver the product or service under the terms specified. For example, if you’re low in stock, you mightn’t be able to accept the purchase order. Remember: if you accept the purchase order, it becomes legally binding.
The next step is to prepare and ship the order based on the terms and conditions specified in the purchase order.
When the buyer receives the order, you can then prepare and send them an invoice.
File the purchase order for future reference in case the buyer later claims that you did not follow the purchase order terms and conditions.
Why Are PO Numbers Important?
It doesn’t matter whether you’re the buyer or seller, a purchase order is a legally binding contract. As such, it protects all parties involved in a transaction.
The buyer can rest easy knowing that with a purchase order, they’ll receive the product or service they purchased (or, if they receive the wrong order, that the mistake will be rectified).
On the other hand, since a purchase order proves that the buyer ordered a product or service from the seller, the seller is guaranteed to get paid for the product or service delivered. Moreover, a PO number can help the seller fill out the order correctly and track how much inventory they’ve sold to each customer.
What’s the Difference Between a Purchase Order and an Invoice?
Many people confuse purchase orders with invoices. The two key difference between the two business documents are:
- When it was created
- Who created it
A purchase order is drafted by the buyer at the start of the transaction to be fulfilled by the seller.
Conversely, an invoice is generated by the seller for the buyer at the end of the transaction using the information from the purchase order.
As a seller, it’s crucial that you include the customer’s PO number in the invoice.
You see: many companies will simply put invoices with no PO numbers aside. That’s because the person responsible for paying invoices at a specific company mightn't know whether the purchase (and the demand for payment) was pre-authorized.
By making sure that your invoice has a PO number, you’re showing that the transaction was pre-approved. This helps ensure that your invoice is processed quickly and reduces the risk of incorrect payments.
When a buyer receives an invoice with a PO number, they’re required to pay according to the terms previously agreed upon (for example, within 30 days of receiving the invoice).
Not every client will send you a purchase order. Creating purchase orders can be time-consuming, which is why small businesses rarely use PO numbers. However, mid-sized and large companies, as well as government entities, will more than likely send you a purchase order for any authorized transaction.
Even if you haven’t received a purchase order yet, it’s good to be prepared. The first step is making sure that your payment gateway gives your customers a chance to submit a PO number.
TillyPay has recently introduced a custom fields feature which lets you collect additional information like PO numbers from your customers right from the payment form. Also, because TillyPay is powered by Stripe, you can easily modify your invoices to include PO numbers, too.