A purchase order or a “PO” in short stands for a process before the purchase transaction itself. It is one thing to make a purchase, but thinking a few steps before the act itself is what the PO is about.

A purchase order is either a procedure in place in your business (or one you can implement) or it’s at least an idea of what you may want to consider before making the transaction. It includes: 

o    Defining the “need” for the purchase and reasoning behind making the expense (or investment if we consider buying assets). I think it’s always good to take a step back and consider twice why we really want to make the purchase (unless it’s buying everyday goods and services);

o    Having price estimations if applicable, i.e. for bigger investments asking price offers (and possibly also conditions if applicable) from potential suppliers;

o    Getting proper approval from respective people responsible for types of expenses;

o    Knowing your expenses that your company potentially will incur over the coming period(s).

The last point is especially important when it comes to accruals and we will explain it later on. So essentially in a nutshell a purchase order is a proposal for a transaction that gives an outsider an idea of why we need it, how much it will cost for us and reflects the respective authorization.