The purpose of a purchase order
Purchase orders are a crucial part of your purchasing processes. Purchase orders (PO) document the purchasing part of your inventory management system and are legally binding documents.
Your procurement department or the person in charge of placing purchase orders issues a purchase order form or PO letter to a supplier or vendor to authorise a purchase. Often, a quote – a documented estimation of the cost of the goods you are buying — precedes a purchase order. You can then simply approve that quote using a PO.
A purchase order is a legal instrument — when a buyer issues a PO it becomes a legally binding agreement when a supplier accepts it. Acceptance can be in the form of acknowledgement, either written approval or by fulfilling the order to the purchase order’s requirements.
Purchase orders help both the buyer and supplier document the transaction necessary in the event of a dispute. For example, once the inventory stock you’ve ordered has arrived, the next steps are to make sure it matches up, receipt it and pay an invoice. Sometimes, your order won’t match up or be right, which you’ll need to return to your supplier. Referencing your PO becomes highly important in these circumstances and provide that added bit of protection for both buyers and suppliers.
How do you create a purchase order template?
Programs like Word and Excel have free templates, but you can also find free to use purchase order templates on apps like Shopify.
Businesses with simple requirements might find that these templates are enough. However, as your business grows in complexity, it might be time to ditch the spreadsheets and opt for something more sophisticated like a supplier management software.
Investing in better supplier management software will streamline this vital process and allow for better tracking from managing stock to creating purchase orders. With more efficient purchasing order process, you can have the right stock on hand at the right time, as well as more time to focus on growing your business rather than getting tied down in paperwork.
Because a purchase order is a binding document (once accepted), businesses issuing a purchase order are contractually obligated to accept the items from a supplier who meets all the PO terms.
Before creating your purchase order terms and conditions, seek legal advice from lawyers. New Zealand businesses can do this via the New Zealand Law Society website, Australian businesses can find a lawyer on the Law Council of Australia site, and UK businesses can refer to the Law Society site.
What should be included on a purchase order?
Purchase orders show what the buyer would like to purchase, how many units they would like to receive and often has the transaction’s terms and conditions.
Given the importance of a purchase order document, businesses in New Zealand generally follow a standard purchase order form that tends to contain the following information where applicable:
- PO number (often aligned with the invoice number to connect the two documents, which is particularly important for reconciling tax records in general)
- PO date
- Details of the supplier
- Details of the buyer and shipping address
- Description and quantity of goods/services you want to buy including price per unit
- Delivery fee
- Total amount excluding GST
- Net amount
- Payment information
- Terms and conditions
In New Zealand, the Ministry of Business, Innovation and Employment (MBIE) has a few procurement templates ranging from procurement values of NZ$5,000 to NZ$100,000. While these templates are for government agencies, suppliers or providers, it is an example of a purchase order template that caters for lower value and low-risk goods or services. The templates are intended to cover items that would typically be contracted for using a purchase order by agreement over the phone or email.
For a UK equivalent, check out this short form terms and conditions created by the Cabinet Office. This resource is meant for low-value procurement and simplifies the legal language to make it more approachable for SMEs.
Australian businesses can refer to the purchase order terms and conditions the Australian Competition and Consumer Commission uses.
Seek legal advice to draw up a tailored purchase order with terms and conditions as your businesses purchase order template may not be sufficient, especially if they are higher-priced and complex items.
Work with your lawyer to write up a purchase order terms and conditions document
Purchase order terms and conditions – a glossary
The terms and conditions of a purchase order show the rights and obligations of the supplier and buyer, and together this makes up the entire agreement of the purchase order. When the terms and conditions are present, the purchase order protects both the supplier and the buyer against any mishaps, depending on the specific terms and conditions established in the offer and the purchase order.
When you start a business relationship with a new supplier, the parties often agree on the terms and conditions that apply to all simple transactions from the get-go, so it is unnecessary to establish new terms and conditions for each transaction. Therefore, the purchase order may or may not always contain contractual terms and conditions. However, where no prior agreement between the supplier and buyer exists, considering including basic terms and conditions in the purchase order.
If one party proposes a change to the contractual terms, it is better to negotiate in a proposal document and not in the purchase order. This will avoid having two documents with differing terms and conditions.
Purchase order terms and conditions typically include these fundamentals:
- General – general description of the terms and conditions and subject matter
- Buyer rights, obligations and incentives
- Supplier rights, obligations and incentives
- Payment terms – show in detail and any incentives or penalties
- Dispute resolution
A day when most businesses are open for business. It excludes Saturday, Sunday and public holidays. A business day starts at 8.30 am and ends at 5 pm. Generally used when stipulating delivery times and payment times.
This is the purchaser of the goods. It is essential to identify the buyer on all purchase orders.
Though a purchase order is legally binding, suppliers and buyers have situations where cancelling an order is the best solution. For example, Nancy mistakenly places an order for 20,000 tubs of glue instead of 200 tubs. The supplier accepts this purchase but Nancy calls and explains the mistake. Both parties agree that it’s best to cancel the order and that there will be no additional costs to cancel because Nancy realised her mistake before the supplier started fulfilling her order.
The total amount payable by the buyer to the supplier. The supplier’s charges generally reflect costs and any expenses stated in the agreement.
Shows the amount payable to the supplier for the goods calculated on the basis stated in the agreement excluding expenses like freight or handling fee.
This section is used to specify how the goods or services should be delivered, as well as to identify responsibility and risk. For example, you could require that every delivery needs to have a valid purchase order number on the packing slip, or that the supplier will appropriately pack the goods at their own expense. This would also be the section to include a clause about delivery in the event of an emergency or disaster.
The address where the supplier must deliver the goods. This is especially relevant for businesses who have a team that orders goods to have them delivered to another location, say, where their warehouse is. This ensures the goods turn up at the right location.
The date of delivery and expected delivery times. This section can also specify what will happen if the delivery is late. For example, the buyer can cancel the order and the supplier will have to pay back reasonable costs related to the missed or late delivery.
Description of goods
The specific requirements for the goods. This is especially important where the buyer is purchasing goods based on their description. For example, Fred purchases 10 yellow 90cm x 80 cm beanbags. The supplier must provide goods that match the description exactly — no other colour or size.
Used for when any disagreement arises on any part of the agreement. It is useful to have a dispute resolution procedure as a first step that parties must follow to resolve conflicts swiftly and keep costs down rather than take expensive legal action.
Used for the reimbursement of any out-of-pocket costs incurred by the supplier in the delivery of the goods and agreed to by the buyer in the agreement.
The goods described in the agreement that the supplier must supply under the purchase order.
In New Zealand, the goods and services tax is set at 15% at the time of writing. GST (or VAT in UK) is typically added to the price of most goods and services. New Zealand businesses earning more than $60,000 in 12 months need to be registered for GST or face penalties.
Used to refer to the buyer and the supplier; collectively they are the parties. The purchase order terms and conditions can state the relationship of the parties. Usually, the Relationship of Parties section explicitly states that there is no special relationship, such as a partnership or joint venture, between the parties.
Also known as terms of payment, this section is used to show payment obligations and instructions clearly. Use this section to include terms such as specifying that the invoices have to be typed or computer-generated and not handwritten, invoices have to be sent to a specific email address, state when payment should be received, and more. This section is also useful for having any penalties for non-payment.
The PO between buyer and supplier for the purchase and sale of goods or services, including the terms and conditions. When either a buyer generates a purchase order and the seller accepts this, or the seller generates a purchase order proposal and the buyer accepts this, a binding contract result for both parties. This contract comprises the legal agreement between the buyer and the supplier, including schedules, any variations and attachments.
This is the person, business, company or organisation supplying and selling goods to the buyer under the agreement.
Differences in purchase order terms in different countries
Businesses when buying or selling in overseas markets will need to be aware of any tariff and customs duties as well as domestic laws governing purchase orders.
Purchase orders in the UK
A purchase order in the UK is sometimes called a work order, and VAT (Value Added Tax) replaces New Zealand’s GST equivalent.
Purchase orders in the US
A purchase order in the US is similar to New Zealand POs. Notably, the US and NZ define their own GST rate.
Without supplier management software to automate and streamline purchasing order process, it can quickly become unwieldy
Improve purchase ordering with supplier management software
Like many business processes, there are methods to speed up the purchase order process reliably. One way here is through automation. Perhaps you have a small business, and you are creating your purchase orders from scratch each time. It might work for now but once more orders start coming through, the manual method offers plenty of opportunities for human error to creep in and create a real headache.
Physical paperwork also tends to be misplaced, leaving gaps in your workflow, and evidence that can cause problems at audit time or when disputes arise. Streamlining and automating the purchase order process can significantly minimise the possibility of these issues.
Using a supplier management software solution means that it’s easier to track where the entire purchase ordering process is up to and to refer to the purchase order quickly when required. It’s more efficient, more accountable and frees up your time to focus on growing your business. Here’s how Unleashed helps you manage your purchases.
All of the examples we use here are for context and discussion purposes only. Unleashed Software does not provide legal advice or legal documentation. When drafting and approving any legal instrument, contract or other legally binding documents, we strongly advise you to seek independent legal advice — especially when dealing in goods and services which are high risk, high value and high complexity.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.