What is a Purchase Order?

What is a Purchase Order (PO)? 

A purchase order (PO) is a formal document issued by a buyer to a supplier that confirms the details of a proposed purchase. It sets out what goods or services are being ordered, the quantity, the agreed price, delivery timescales, and payment terms. 

Once the supplier accepts the purchase order, it becomes a legally binding agreement. This means both parties are committed to the terms outlined in the document. For the buyer, this offers reassurance that pricing and delivery conditions are fixed. For the supplier, it provides confidence that payment will be made once the order is fulfilled. 

Although purchase orders are often associated with larger organisations, they can be equally valuable for small businesses and sole traders. Any business that orders goods or services on credit, works with multiple suppliers, or wants clearer oversight of spending can benefit from using purchase orders consistently. 

What are Purchase Orders used for? 

Purchase orders act as a control point between deciding to buy something and paying for it. Rather than relying on emails or verbal agreements, a purchase order clearly records the transaction in advance and ensures everyone involved understands what has been agreed. 

In practical terms, purchase orders are used to: 

• Control spending by ensuring purchases are approved before money is committed 

• Reduce misunderstandings by clearly documenting prices, quantities, and terms 

• Simplify invoice checking by allowing invoices to be matched to approved orders 

• Improve cash flow visibility by showing upcoming financial commitments 

They are particularly useful for businesses with multiple suppliers or more than one person involved in ordering. By creating a clear audit trail, purchase orders reduce the likelihood of disputes and help businesses stay organised as they grow. 

Purchase orders also support better budgeting. By raising a PO before committing to spend, businesses gain visibility over upcoming costs, allowing them to plan payments more effectively. When combined with reliable payment tools, this can significantly reduce financial pressure. To find out about choosing the right setup, take a look at our blog on best payment systems for small businesses in the UK. 

What is a Purchase Order Number? 

A purchase order number is a unique reference assigned to each purchase order. Its purpose is to allow both the buyer and supplier to track the order throughout its lifecycle, from creation through to payment. 

The purchase order number links together all related documents, including delivery notes and invoices. When a supplier submits an invoice, referencing the PO number allows the buyer to quickly verify that the charges match what was originally agreed. This reduces delays, avoids duplicate payments, and simplifies bookkeeping. 

As a business grows and transaction volumes increase, PO numbers become increasingly important. Without them, it can be difficult to trace orders or resolve disputes efficiently, particularly when several purchases are made with the same supplier. 

How do Purchase Orders work? 

While systems may vary, the way purchase orders work is generally consistent across businesses. The process begins when a need for goods or services is identified. Before placing the order, a purchase order is created and approved, ensuring the spend is authorised. 

Once sent to the supplier and accepted, the supplier delivers the goods or completes the service as agreed. After delivery, the supplier issues an invoice that references the purchase order number. The buyer then checks the invoice against the original purchase order before making payment. 

This process creates a clear audit trail and ensures businesses only pay for what they have approved and received. From an accounting perspective, this aligns with HMRC expectations around maintaining accurate records and supporting evidence for business expenses. 

How to create a Purchase Order 

Creating a purchase order does not need to be complicated. Many small businesses begin with simple templates that include all the essential details. As operations become more complex, accounting software can automate much of the process and reduce manual errors. 

A purchase order typically includes business and supplier details, a description of the goods or services, pricing, delivery information, and payment terms, along with the unique PO number. What matters most is consistency. Using the same format and numbering system makes purchase orders far easier to manage over time. 

As financial administration grows, some businesses choose to seek professional support to ensure systems remain efficient and compliant. If you are unsure whether your current processes are fit for purpose, our guide on hiring an accountant for a small business explores when expert advice can add value. 

How to raise a Purchase Order in a Small Business 

To “raise” a purchase order simply means to formally issue it to a supplier before any work begins. This step is important because it confirms that the purchase has been approved and that both parties understand the agreed terms. 

For small businesses, raising purchase orders can feel like an extra administrative step, but it often saves time later. Clear documentation reduces the need for back-and-forth communication and makes invoice checking far more straightforward. Even in businesses with small teams, purchase orders can help establish financial discipline and accountability. 

Purchase Orders and Invoicing: what’s the difference? 

Purchase orders and invoices are closely linked but serve different purposes. A purchase order is issued before goods or services are supplied and confirms what the buyer has agreed to purchase. An invoice is issued after delivery and requests payment for what has been supplied. 

When used together, purchase orders and invoices create a strong financial control. The purchase order confirms approval, while the invoice confirms the charge. Matching the two ensures businesses only pay for what was agreed and received. 

This is particularly important for VAT-registered businesses, as HMRC requires accurate records to support VAT returns and expense claims. Purchase orders help demonstrate that costs were legitimate business expenses. 

Do Small Businesses need Purchase Orders? 

There is no legal requirement for most small businesses to use purchase orders. However, many find them increasingly valuable as operations grow and transaction volumes increase. 

Purchase orders are especially useful if you: 

• Work with multiple suppliers or contractors 

• Place regular or repeat orders 

• Want clearer control over spending and approvals 

• Need stronger financial records for tax, funding, or insurance purposes 

They can also improve professionalism. Suppliers often view purchase orders as a sign that a business is organised and financially reliable, which can strengthen working relationships and reduce the risk of disputes. 

Purchase Orders and business risk management 

Although purchase orders are primarily an administrative tool, they also play an important role in managing business risk. Clear documentation helps reduce disagreements with suppliers and provides evidence if disputes arise. 

From a business insurance perspective, accurate purchasing records support smoother resolution of claims where supplier issues disrupt operations. They also demonstrate that a business has appropriate financial controls in place, which can be important when dealing with insurers, lenders, or regulatory bodies. 

Why Purchase Orders are worth considering 

Purchase orders provide clarity, control, and accountability — all of which are particularly valuable for small businesses managing limited time and resources. They help prevent disputes, improve visibility over spending, and support compliance with UK accounting expectations. 

While they introduce a small additional step into the purchasing process, the long-term benefits often outweigh the effort. By documenting agreements clearly and linking purchasing with invoicing and payments, purchase orders can help businesses operate more smoothly and with greater confidence. 

*Disclaimer – This blog has been created as general information and should not be taken as advice. Make sure you have the correct level of insurance for your requirements and always review policy documentation. Information is factually accurate at the time of publishing but may have become out of date.