Purchase Orders: Why Your Business Needs Them and How to Use Them

Purchase orders sound like corporate overhead. Why fill out a form when you can email a supplier and deal with the invoice when it arrives?

Here's the thing: purchase orders aren't paperwork. They're proof. When a supplier invoices you for 50 units but your order was for 40. When prices jump between order and invoice. When HMRC asks about a £12,000 spend you can't quite remember approving. That's when a purchase order — a formal document specifying exactly what you ordered, at what price, in what quantity — stops being optional.

We've built purchase order management into our accounting platform because we see this everywhere: the businesses that track POs have fewer disputes, tighter control over spending, and cleaner accounts. The ones who skip them spend Tuesday mornings chasing down suppliers and Friday afternoons trying to figure out where the budget went.

This is what you need to know about why purchase orders actually matter, and how to implement them without turning your business into a bureaucracy.

What is a purchase order?

A purchase order (PO) is a formal commitment. You're telling a supplier: "I agree to buy X items at Y price with Z delivery terms." They accept, and under the Sale of Goods Act 2015, you've both got a binding contract.

That's the whole point. Before the money moves, both sides have agreed on exactly what's changing hands. No surprises. No "I thought we said 40 units" conversations. No invoices that don't match what you actually ordered.

The PO is also your evidence. When a delivery shows up wrong, an invoice is inflated, or someone's disputing whether they agreed to something — the PO is your record. "This is what we agreed to. Here's the document."

The PO workflow, simplified

A purchase order has one job: to formalize the order before you pay for it.

Here's how it actually flows:

1. Identify the need — You (or a team member) need goods or services: inventory stock, office equipment, a contractor.

2. Create the PO — Document what you're ordering: items, quantities, unit prices, total, delivery date, payment terms. Some businesses assign every PO a unique number and date it. Others keep it simple.

3. Get approval — If the amount is above your threshold (say, £250), get sign-off from the owner or finance person. This is where control lives.

4. Send to the supplier — Email it, call them, fax it (yes, some suppliers still want fax). They confirm they can fulfill it at those terms.

5. Receive and check — When the goods or service arrives, match it against the PO. Right quantity? Right quality? Right delivery time? If something's off, flag it now.

6. Match the invoice — When the bill comes in, you do what's called "three-way matching": PO says 40 units, delivery note says 40 units, invoice says 40 units. All three agree. If they don't, investigate before paying. This matters especially if you're using accrual accounting — your accounts need to reflect the true cost of what you've ordered, not just what you've paid.

7. Pay — Once everything's matched, you process the payment according to your agreed terms.

That sounds like extra steps. It's not. It's the same steps you're doing anyway (ordering, receiving, invoicing, paying) — just with a document tying them together.

Why purchase orders actually matter

You know your spending before the money leaves

Without POs, you only know how much you've spent when invoices arrive. By then it's gone, and if it's more than you expected, you've got a problem.

With POs, you know your committed spending. You've approved 20 orders worth £15,000 this month but only received invoices for £8,000. That means £7,000 is still coming. You can forecast accurately, manage your cash flow better, and catch runaway spending before it happens. This is essential if you have team members placing orders — without visibility into their POs, your accounts surprise you.

You prevent disputes

A supplier sends an invoice for £3,500. Your original order was £2,800. Did the price change? Was there an extra charge? Did you mis-remember?

With a PO, there's no memory involved. The PO says £2,800. The invoice doesn't match. You ask the supplier. That's the conversation — backed by a document both of you signed. Without a PO, it's a he-said-she-said mess.

You catch errors before paying

Suppliers make mistakes. An invoice for 50 units when you ordered 40. A price per unit that doesn't match the quote. These slip through without a PO check.

Three-way matching catches these errors. You don't pay for something you didn't order or something that wasn't delivered.

You have an audit trail

HMRC can ask about any business expense. They expect VAT records for six years. A clean chain — PO, delivery confirmation, invoice, payment — is exactly what an auditor wants to see. It proves the purchase was authorized, received, and correctly invoiced. When year-end accounting rolls around and you're backing up every category of expense, POs make that process straightforward instead of painful.

Building a PO system that actually works

For a small business, this doesn't mean enterprise procurement software. It means a process.

Pick a threshold. Any purchase above £100 or £250 or £500 (you decide) needs a PO. Below that, use a company card or petty cash with basic receipt tracking. This keeps the process practical without drowning in paperwork.

Use a consistent format. Whether it's an email template, a spreadsheet, or dedicated software — consistency matters. Every PO should have: supplier, items, quantities, unit prices, total, delivery date, payment terms, and who approved it.

Set approval rules. If an order is under £500, no approval needed. Between £500 and £2,000, manager approval. Over £2,000, owner approval. (Adjust the amounts for your business.) This gives control without bottlenecking.

Email the PO to the supplier. Make it official. Get confirmation they received it and can fulfill it.

Track open POs. Keep a simple list of POs awaiting delivery. When the goods arrive or invoice comes in, you know what to match it against. Accounting platforms let you tag and categorize spending this way, automatically flagging orders that haven't been matched to invoices yet.

Match before paying. Don't pay an invoice just because the number looks reasonable. Match it to the PO. If quantities or prices don't align, ask the supplier before processing payment.

This process scales. A one-person business using a simple checklist and a spreadsheet. A ten-person business using integrated accounting software. Same principle, different tools.

Common PO problems (and how to avoid them)

The phantom invoice: A supplier sends an invoice for something nobody ordered. This happens when employees bypass the PO process and order verbally. Solution: make POs mandatory for anything above your threshold, and communicate that to suppliers so they know to expect them.

The silent amendment: Someone says "we need 50 units instead of 40" in a Slack message, but the PO is never updated. Then you get invoiced for 50 while your records say 40. Solution: all changes must be documented in writing — either via PO amendment or a new PO.

The forgotten PO: Goods arrive, nobody matches the invoice to the PO, and it gets paid without verification. Solution: review open POs weekly. If a PO is waiting for delivery and the delivery should have arrived by now, chase the supplier.

The after-the-fact PO: Someone buys something, then creates a PO retroactively to cover it. This defeats the entire purpose — the PO authorizes spending before it happens. If this becomes common, your approval process is broken.

Frequently Asked Questions

Do I really need a PO for everything? No. Set a threshold — say, anything over £250. Below that, a receipt or card statement is fine. Above that, a PO prevents disputes and keeps your accounts organized.

What if a supplier refuses to accept a PO? Some do, especially small vendors. Send the PO anyway as a record of what you've agreed to. If they send an invoice that doesn't match, you have the PO as your evidence of what was actually ordered.

Is three-way matching overkill for a small business? For services (consulting, freelance work), two-way matching (PO to invoice) is usually enough — there's nothing physical to receive. For goods, three-way matching catches real errors: quantity mismatches, damaged items, price changes. Worth doing.

Should I use spreadsheets or software? Spreadsheets work when volumes are low. But as you grow, they break down: version control becomes a problem, nobody knows which version is current, and there's no automatic link between PO and invoice. Software is better because it keeps everything connected and automatically flags mismatches.

What if I order from the same supplier every week? A PO for every order might feel excessive, but it's actually more efficient than checking invoices for discrepancies. Alternatively, use a standing order agreement: one master PO covering regular purchases, then individual delivery schedules. The supplier knows what you typically order, you know what to expect, and invoices match automatically.

How long should I keep POs? HMRC expects VAT records for six years. Keep your POs, delivery notes, and matched invoices for at least that long. Store them digitally — in your accounting software is ideal.

What about cash purchases and personal reimbursement? POs are for orders from suppliers. If you buy something out of pocket and need reimbursement, keep the receipt. If you're ordering supplies regularly from a vendor, that's a PO situation.

Can I use POs with digital payments? Absolutely. POs work with any payment method: bank transfer, card, cheque, standing order. The PO itself is just the authorization document.

The payoff

Purchase orders solve a quiet problem: the gap between what you ordered and what you're paying for.

Most small businesses don't track this gap until they feel the pain. Then one quarter, they review their spending, notice it's 15% higher than expected, and can't work out why. Or a supplier "clarifies" a price that was supposed to be locked. Or HMRC audits a category of expense and finds the supporting documentation is chaos.

A simple PO process prevents all of this. It doesn't require software (though software helps). It doesn't mean creating a procurement department. It means one consistent process: before you pay, you have a record of what was agreed.

Your future self — reviewing accounts, answering auditor questions, or chasing down a billing dispute — will be grateful for the five minutes it takes to create a PO today.

Ready to make PO management automatic? Relentify's accounting platform links POs directly to your invoices and flags mismatches before you pay — no spreadsheet mess. Start free for 14 days to see the difference.