In any business that involves procurement—whether it’s raw materials, office equipment, or outsourced services—purchase orders play a pivotal role in maintaining clarity, control, and accountability. Understanding what a purchase order is, how it’s issued, and how to manage it effectively is key to building reliable relationships with suppliers and avoiding costly procurement errors.

What Is a Purchase Order?

A purchase order (PO) is a formal document issued by a buyer to a seller that outlines the details of a purchase request. It includes information such as:

  • A description of the goods or services
  • Quantity and price
  • Delivery date and location
  • Payment terms
  • Purchase order number (a unique identifier)

Once the vendor accepts, a purchase order becomes a legally binding contract. It protects both the buyer and the supplier by clearly documenting expectations.

Who Issues a Purchase Order?

The buyer issues the purchase order, typically someone from the procurement, operations, or finance department. In larger organizations, the procurement team may use automated software to generate and manage POs as part of a broader purchasing workflow. The PO is a communication tool between the buyer and the vendor or supplier. It signals the buyer’s intent to purchase and outlines all necessary details to fulfill the order.

What Happens Before a Purchase Order Is Issued?

Before a PO is created and sent, several important steps typically occur:

1. Internal Request

An internal team identifies a need and submits a purchase request (also known as a requisition). This is a preliminary step that triggers the procurement process.

2. Vendor Selection

The procurement team evaluates suppliers based on criteria such as pricing, quality, availability, and reliability. This might involve comparing quotes or undergoing a formal vendor onboarding process.

3. Budget Approval

The requisition may need approval from finance or senior leadership to ensure the purchase aligns with budget constraints and strategic goals.

4. Negotiation of Terms

Before sending the PO, there may be back-and-forth communication with the vendor to confirm pricing, lead times, delivery conditions, and payment terms. Once these steps are completed and everyone is aligned, the PO is formally issued.  It’s not unusual for companies to prepare and share draft POs before issuing a final, approved version—particularly when:

  • The order involves custom products or services

  • Prices or terms need to be negotiated

  • The buyer wants to confirm details like availability, lead time, or payment schedules before locking it in

This draft typically serves as a preliminary document—a way to put proposed terms in writing without creating a binding commitment just yet.

In some cases, instead of sending a draft PO, buyers first request a pro forma invoice from the vendor. Once the quote is reviewed and approved, a formal PO is issued referencing the quote.

Why Purchase Orders Matter

Purchase orders offer more than just paperwork. They’re foundational to effective procurement for several reasons:

  • Clarity: Everyone—from warehouse managers to vendors—knows what to expect.
  • Accountability: Clear records make it easier to audit and track spending.
  • Legal Protection: If disputes arise, the PO serves as an enforceable agreement.
  • Inventory Management: POs help teams forecast inventory and align procurement with production or project timelines.

Best Practices for Managing Purchase Orders

Working with external vendors introduces complexity. To manage POs effectively and maintain healthy supplier relationships, consider the following best practices:

1. Standardize the PO Process

Use a consistent format for all POs and create internal policies outlining who can approve and issue them. Consider using procurement software to reduce manual errors and streamline approval workflows.

2. Maintain Clear Communication With Vendors

Ensure suppliers understand your PO format, expectations, and delivery requirements. Build feedback loops for resolving discrepancies quickly.

3. Track POs Diligently

Monitor the status of every purchase order—from approval to delivery. This helps you detect delays early and maintain accurate financial records.

4. Reconcile Invoices With POs and Goods Received Notes

Implement a three-way match process: compare the vendor’s invoice, the PO, and the delivery note to ensure consistency before making payment.

5. Review and Analyze PO Data

Regularly analyze your PO data to identify trends like frequent suppliers, recurring delays, or areas for cost savings.

Purchase Order vs. Invoice: What’s the Difference?

Although they often appear in the same workflow, purchase orders and invoices serve very different purposes. 

As mentioned, A purchase order (PO) outlines the details of a purchase request; however, an invoice serves as a request for payment after the goods have been delivered. 

Key Differences: 

Invoice

Issued by: The supplier. 

Purpose: To request payment for delivered goods/services 

Timing: After delivery or service completion. 

Purchase Order

Issued by: The buyer

Purpose: To initiate and authorize a purchase

Timing: Before delivery or fulfilment. 

Cancelling a PO

Purchase orders (POs) can be cancelled, but doing so involves operational and relational considerations. Because a PO becomes a legally binding agreement once accepted by a vendor, cancelling it without due process or communication can strain supplier relationships, lead to financial penalties, or even breach of contract claims.

Common Reasons for Cancelling a Purchase Order

Purchase orders are typically cancelled when:

  • The business needs changes (e.g., a project is postponed or cancelled)
  • Budget constraints or funding issues arise
  • Errors are discovered in the original PO (e.g., wrong item, quantity, or delivery address)
  • The vendor fails to meet agreed conditions (e.g., can’t deliver on time or increases pricing)

How to Cancel a Purchase Order Responsibly

Here’s a step-by-step guide to cancelling a PO professionally, with minimal impact on vendor relationships:

1. Review the PO Terms

Before initiating cancellation, check the original PO and any attached terms and conditions. Look for clauses related to cancellation, restocking fees, or penalties.

2. Act Promptly

The earlier you act, the better. Cancelling before the vendor has incurred costs (e.g., procurement of materials or production) reduces the likelihood of financial or legal implications.

3. Communicate Directly and Transparently

Contact your supplier—ideally by phone or video call if the order is sensitive—then follow up in writing. Be clear about:

  • The reason for the cancellation
  • Whether a partial order is still needed
  • Willingness to cover any reasonable costs already incurred

This shows respect for their time and resources.

4. Use a Formal Cancellation Process

Issue a purchase order cancellation notice—a formal document that references the original PO number, cancellation date, reason for cancellation, and any agreed next steps (e.g., issuing a revised PO, covering expenses, etc.).

In organizations using ERP or procurement software, cancellation should also be recorded in the system to update inventory, budgets, and audit trails.

5. Document Everything

Maintain records of all communication related to the cancellation, including emails, signed acknowledgments, and internal approvals. This helps prevent disputes and supports accountability.

Best Practices to Prevent Disruption or Damaged Relationships

  • Build cancellation clauses into vendor contracts so expectations are clear from the start.
  • Avoid frequent cancellations, which can frustrate suppliers and lead to reduced priority or stricter terms in the future.
  • Offer compensation if the vendor has already incurred costs—this goes a long way in preserving goodwill.
  • Use a change order process when only part of the PO needs to be modified rather than cancelled entirely.

Final Thoughts

Purchase orders may seem like a routine administrative task, but they are a linchpin of operational efficiency and financial control. They reduce risk, support vendor accountability, and help teams confidently operate when managed well.

Whether you’re scaling your procurement process or optimizing an existing workflow, mastering the PO lifecycle is a strategic step toward better business operations.