What are Purchase Order (PO) Numbers? Complete Overview

With B2B purchases online rising significantly in the last decade, purchase orders and the significance of the purchase order number are key components of these transactions. While purchase orders may initially seem like additional paperwork, any growing company knows that the details in a PO are critical to managing and completing the purchase.

This rise in online B2B purchases is demonstrated by Statista’s bar chart for global B2B eCommerce growth trends in gross merchandise value by year, which increased from $5.826 billion to $12.216 billion from years 2013 to 2019. 

These B2B purchases are far more complicated than most consumer-grade transactions, so knowing the best ways to organize and conduct them using purchase orders is necessary to ensure a smooth and compliant business relationship. Let’s review purchase orders, their place in the procure-to-pay cycle, purchase order approval, and how to manage the PO number.

How Does a Purchase Order Work?

Before we discuss purchase order numbers in detail, we need to discuss the general approval workflow for POs and related documents for purchase order management and supplier invoices in accounts payable.

What Is a Purchase Order Form?

We understand purchase orders, so what is a purchase order form? When a buyer or client wants to procure products or services from a vendor or supplier, the buyer uses a purchase order form to communicate the exact nature of the transaction, including the product quantity, delivery date, payment due date, etc. It’s created after the purchase request is approved internally, and then sent to the vendor so it can be fulfilled. At this point, the PO is considered a legally binding document.

In addition to the standard details mentioned above, a typical purchase order will contain the following components:

• The date of the order
• Payment terms and conditions
• Delivery date and payment deadlines
• Applicable taxes
• Contact information for both the client and the supplier
• The billing address
• A unique PO number

Payment terms include the invoice due date and early payment discount. 

A PO essentially provides clarity into the purchase for both the buyer and the seller, forming a legal document that sets everything in stone before the shipments begin. There are a few special cases of POs, such as the blanket purchase order for repeated transactions over a period, but we’ll keep things simple for the sake of this article.

Why Do Purchase Orders Matter?

We’ve mentioned that purchase orders solidify any communication between the buyer and the seller regarding a specific transaction, but there are other reasons to use POs. Companies go through the trouble of working with these documents for several reasons:

• Obtaining purchase order approvals: Before making purchases, your business needs to approve purchase requisitions to control spending and have a purchase order approval process.
• Tracking transactions: The purchasing business can use a PO to keep track of orders, when it can expect the goods to be delivered, and confirmation of delivery through a goods received note (GRN). With a tangible document, organizing operations and budgeting properly are much easier tasks.
• Legally binding contract: POs are essentially legal protection for the purchase. Should there be any delivery problems or payment failures, both sides can reference the PO document to prove who’s at fault and who needs to fix the problem.
• Matching invoices with purchase orders. During invoice processing, invoices are matched by line item with POs to determine authenticity, spending pre-authorization, and accuracy of pricing, quantities, and payment balance due.
• Auditing: In a financial audit, a purchase order acts as a conclusive paper trail to cross-check invoices in disbursements and generally verify your purchasing activity.

It’s worth noting that you don’t have to create a purchase order for every transaction. Some examples include:

• Transactions where the amount is below a certain threshold: When the amount of money is small enough, most companies skip over the purchase order phase to simplify operations.
• Purchases where the total cost is initially unknown: For instance, advertising or legal expenses do not use purchase orders.
• Certain regular payments: Utility bills like electricity and gas, as well as subscription services, usually just come with regular monthly billing.
• Expense reimbursements: These payments made to employees internally for travel costs, supplies, and other materials go through a reimbursement request rather than a PO.

POs play a vital role in order fulfillment and buyer-vendor communication, but they aren’t the only documents to keep track of.

What About Other Transactional Documents?

Other transactional documents besides the purchase order are the invoice and sales order. The purchase order and invoice have different purposes. 

What’s the distinction between a purchase order and an invoice? The buyer writes the purchase order before the transaction. In contrast, an invoice with agreed-upon prices and PO terms is issued by the seller (using an invoice template) upon fulfillment in the procurement process to define what the buyer must pay during the invoice processing and payment process.

A PO number is naturally always present on a purchase order, though you won’t always find a number on an invoice. These “non-PO invoices” lack an invoice number because they were not for pre-approved transactions and do not have a corresponding purchase order.

Another type of document you might see is the sales order, which is sent out by a vendor to the buyer to confirm a business transaction before the order is fulfilled and the seller issues a sales invoice.

What is a PO Number?

A PO number is a unique identifying number assigned to a purchase order – the document detailing the buyer’s intention to purchase goods or services from a specific vendor or supplier. The PO number is important for managing and tracking purchases, as well as an asset in record keeping for AP and accounting teams.

A PO numbering system is key when you work with a large number of purchase orders regularly, as most buyers and sellers do. If the PO form numbering system is sequential and controlled as a type of internal control, it can protect your company from bad actors using unauthorized PO numbers to perpetrate fraud. 

How Exactly Does a Purchase Order Number Help?

Procurement and finance departments use PO tracking numbers largely for organizational and legal reasons:

• Setting prices in stone so that neither party can change what was previously agreed upon
• Having exact numbers decided on regarding who owes what
• Matching a corresponding invoice to the PO when fulfillment is completed to resolve discrepancies
• Inventory management and cash flow planning so that you know exactly what has been purchased and what will arrive at a certain date
• For future auditing purposes, having the number facilitates digging up the old document if you ever need to reference an old purchase

A unique PO number simply makes order tracking faster and more accurate for both sides, preventing duplicate payments or filing mistakes from occurring.

How Are PO Numbers Made?

As there’s no industry standard for the practice, the system of generating purchase order numbers differs among businesses. But before you go randomly generating numbers for your POs, let’s go over a systematic way of assigning tracking numbers so that you can get the most out of this numbering system.

Generating an Individual PO Number

PO numbers are decided by the buyer. Creating a unique PO number is straightforward if you’re a small business owner with relatively few purchases to make.

Just use a unique number assigned to identify each transaction. For example, 00001 for the first one, followed sequentially by 00002, 00003, 00004, and so on. You can also use letters and symbols if you believe they will help simplify the process. Generating purchase orders and PO numbers takes much less thought when using an automated process. 

Write this string out on every purchase order document you produce somewhere near the top. Be sure to include other essential PO information, like the other party’s name, the amount, and any order details as mentioned previously. Do so for every transaction you undergo, regardless of the time, nature of the order, or the vendor.

Keeping track of PO numbers can help contribute to a healthier procurement policy in a business. Some best practices when working with PO systems include:

• Tracking all your suppliers through a database so that you can quickly find and contact one should you have any inquiries about a past invoice.
• Developing an approval workflow to process requisitions, purchase orders, and other documents accurately and quickly.
• Setting up proper recordkeeping to generate an audit trail and make auditing easier should the need for it arise in the future.
• Ensuring quality assurance by checking for errors and duplicates early on in the purchase orders.
• Allowing for cancellations and documenting them properly so that they fit within your PO management system.

However, since purchase orders are such an important part of a business’s financial health and inventory management, you might want to consider working with professional purchase order systems that automatically create purchase orders from approved purchase requisitions. This modern purchasing process functionality is often part of an overall third-party cloud-based accounting software solution for procurement finance automation. 

Working with a PO Number System

Accurately handling multiple and ongoing purchase orders can take a lot out of the budget and available manpower in your business. Therefore, some companies save time and money by outsourcing the work to a third-party add-on software platform.

For instance, certain enterprise resource planning (ERP) or accounting software automatically generates and assigns a unique number and puts it down on a PO template for fast processing. Integrated automation software can help route the documents to the appropriate stakeholder or team for accelerated sign-offs.

This practice is known as automatic PO number generation, and it’s been gaining steam in recent years as cloud-based service providers have greatly cheapened its adoption cost. Larger businesses that find the manual approach of number generation and assignment too impractical and inaccurate look to these platforms for solutions.

The Takeaway: Optimizing the Purchase Order Process Should Be a Top Priority

Purchase order numbers are unique identifiers for every PO document you process and send to another company. These numbers greatly simplify the management of individual documents and help with financial auditing and controls.

How you handle PO numbers is up to you. While you can create your internal system of numerics, it’s strongly recommended to outsource the job to a third-party platform that integrates with your procurement and accounting system ERP when your purchasing activity begins to increase in size and complexity. 

Optimizing the PO processing and approval cycle is all about implementing the right tools and automation solutions to get the job done quickly with accurate records and forms without using time-consuming manual processes. Tipalti Procurement provides purchase order process automation with best practices for creating entire purchase orders with unique purchase order numbers and data from approved purchase requests. It uses a system-based digital purchase order template form. 

Tipalti Procurement automation software includes purchase requisition and purchase order approval software. Learn more about how to streamline and reduce your company’s workload for creating and approving purchase requisitions and purchase orders.