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A Complete Guide To Creating Purchase Orders (Plus, How To Improve Your PO Process)
Running a direct-to-consumer (DTC) brand means you regularly hand over cash to buy new inventory. And purchase orders are essential to this process.
Get POs wrong, and you’ll likely be left with a stockout or overstock situation (both of which can cost you a pretty penny). But get POs right, and you can build a more accurate and efficient replenishment process (which means reclaiming more time and more of your profits).
Interested in improving your purchase order process and retaining more revenue? No sweat — we’re here to help you navigate the sometimes-confusing work of PO management.
A purchase order (PO) is an official contract a buyer (AKA, your DTC brand) creates and presents to a seller (your supplier) to purchase a specified number of goods.
In short, a PO is a list of items your brand wants to buy from a vendor. It details the types and quantities of products you need, as well as information on payment terms and delivery timelines.
So, when you submit a PO to a vendor, you commit to purchasing those specific products for an agreed-upon price. But the transaction hinges on whether your supplier has those goods available when you need them.
If so, you and your supplier need to nail down all kinds of other important details — like delivery timelines — before that PO is officially approved and can be fulfilled.
While they sound like a bore to fill out, purchase orders aren’t just superfluous paperwork. POs are a huge help when it comes to running your business and keeping an eye on your business’s financial health.
While establishing a PO process requires more time and effort on the front end, you save yourself many headaches (and hours) in the long run. That’s because a purchase order system uses item catalogs from your favorite vendors to simplify the procurement process. That way, you just need to select from the products available and place your order.
And if you regularly purchase the same products and quantities, you can automate POs and reorder inventory on a recurring schedule. Meaning, you can nix all those manual orders while still getting your goods on time.
But a PO process makes deliveries more efficient as well. Since you have an itemized list of everything you’ve purchased, when you get your order, all you have to do is match up the items you received with what’s written on the PO.
Now, verifying the accuracy of those deliveries is a breeze with detailed POs! You can quickly double-check that no items are missing and that suppliers are following through on their part of the contract. And if there’s a mismatch between the PO and the products in your shipment, you can flag that discrepancy with your vendor.
Because purchase orders list all your product’s pricing information, they’re also handy for budgeting. More specifically, POs are a record of your spending.
By cross-referencing your previous POs with your up-to-date sales data, you can better estimate how much inventory you need to turn a profit. And with this greater visibility into your spending, you can set aside the right amount of cash to buy whatever inventory you need based on your demand forecasts.
Plus, implementing a purchase order system means you can establish standard policies on who can make purchases and how much of each item to buy at once. These guidelines help to control your spending. Since only authorized people can place purchase orders, it’s easier to account for any unexpected (or unnecessary) purchases and adjust as needed.
Matching your physical inventory counts with your inventory records is mind-numbering — and a strain on your time and resources. But with a PO process in place, inventory management becomes much simpler. That’s because POs track when items will arrive at your warehouse and in what quantities.
As we mentioned, once those products show up, you can compare the items received with what’s listed on your PO. This makes maintaining your inventory records quick and easy. Even better, this creates a paper trail that helps with any audits. Since POs keep all your product info organized and accessible, inventory audits should be relatively painless.
🚨 Spoiler: Using a purchasing tool like Cogsy makes it easy to centralize these documents, so you can reference back in seconds. When all your stock data is just a few clicks away, you can quickly compare those numbers to your current financial records and complete an audit in no time.
Purchasing the wrong product quantity or type can be costly a mistake — especially for small businesses with a limited budget.
Fortunately, POs minimize errors and inaccuracies in the purchasing process. How, exactly? Well, purchase orders are a clear record of your product’s quantities and specific prices. So, if there’s a miscommunication between your procurement team and the supplier, they can cross-reference the PO and correct potential mistakes.
And as we teased earlier, having all your previous POs (and all that juicy data) at your fingertips makes it easier to accurately forecast demand — which can save you from losing sales due to dreaded stockouts or dead stock.
📝 Note: Stockouts cost retailers an average of about $1 trillion annually, while dead stock costs 30% more than the inventory’s value (on average). In other words, having too much or too little stock has a massive impact on your bottom line.
Purchase orders are far more than just a little of products you need —they’re binding legal documents between brands and suppliers. So, if there’s ever a problem with the wrong products or quantities being delivered, the PO offers clarity (and legal protection), so you can resolve the issue faster.
A PO can also guard your brand against unexpected price increases since the cost for each item is clearly listed and formally agreed upon. There’s no way for the supplier to pull a fast one when you have official documentation you can refer to at any time.
This is a massive perk, given how the costs for raw materials continue to climb. The buck has to stop somewhere with those hefty costs, but your POs ensure that person isn’t you!
👉 Did your supplier just raise prices? Here’s how to respond.
With that many benefits, we suspect you’re now on board with creating a purchase order process (I mean – who wouldn’t be?). So, let’s walk you through building a PO of your own.
The first step to creating a purchase order is to determine what inventory you need — including product quantities and the date you need those items. That’s where the right tool can help.
Consulting your demand forecasts is the best way to determine the products and quantities you need at any given time. If you’ve used an end-to-end purchasing software like Cogsy to build inventory forecasts, you’ll have an accurate picture of your brand’s inventory needs immediately.
To get the most up-to-date picture of your needs, you’ll want to rely on software that leverages real-time and historical data (and considers current buying trends) when demand planning. Meaning, this software includes all the latest info to figure out your exact inventory requirements.
🔥 Tip: Cogsy’s planning feature can calculate what inventory you need (in several growth scenarios) with just a few clicks. That way, you can plan for anything and stock up accordingly. But don’t take our word for it — try Cogsy free for 14 days!
Once you’ve pinpointed how much inventory you need, you can start drafting your PO. Each purchase order should include 5 key elements:
The header appears at the top of your purchase order form. Here, you’ll add details about your brand (as the buyer). This includes your company name and mailing address, as well as your purchase order number, order date, and customer ID.
The supplier section is for details about your vendor (AKA, the purchase order recipient). Here, you’ll list the supplier’s name, mailing address, email address, phone number, and any other contact information that’ll help you or your fulfillment partners get ahold of them.
The shipping section details how and where your products will be delivered. Along with the shipping address, you’ll want to specify the shipping method, shipping terms, and agreed-upon delivery date. If the shipping address differs from your billing address, be sure to note that here as well.
This is where you’ll probably spend the most time when putting together your PO. It’s the largest section, and each new line item must include:
At the bottom of your PO, you’ll share a summary of your costs. You’ll add up your subtotals by line. Then, outline any discounts, allowances, or other applicable costs (like taxes and handling fees, for example).
Finally, include the total cost for your entire order.
🔥Tip: Don’t want to reinvent the wheel whenever you need to send a PO? Use our handy purchase order template instead of creating one from scratch, and check out our in-depth walkthrough on how to fill out a PO.
After you’ve drafted your purchase order, you’ll send this document to the seller, and then… well, just sit tight. Before moving forward, you’ll need the vendor to give you the OK on the PO.
Want to keep this process from dragging on? Give your vendor a clear deadline for when you need their approval.
To be approved, the seller must review the PO and confirm whether they have enough inventory to fulfill the order by the requested date. If they have the right amount of inventory available, they’ll approve the PO, and it officially becomes a binding contract for both you and your vendor.
📝 Note: Don’t be discouraged if your seller initially rejects your PO. This can happen when suppliers have limited bandwidth or your PO doesn’t meet their minimum order quantity. In that case, you may need to create another draft or look for a different supplier.
Ideally, you finish any back-and-forth negotiations with your seller to receive your shipment as scheduled — or with enough of a buffer to source products from another seller (if the original supplier isn’t up to the task).
Once your vendor approves your PO, the ball is in the seller’s proverbial court. More simply, they need to deliver your products by the agreed-upon date.
That’s where fulfillment comes in. Fulfillment refers to all necessary steps the seller must take to get your your order, and it’s an integral part of the overall PO process. Not only do shipments need to be delivered on time, but the contents of each shipment have to match your PO.
Delayed or incorrect shipments are not only a pain to deal with, but they’re also expensive and can impact your customer retention. In fact, 58% of shoppers say they’d stop buying from a brand after 1-3 supply chain delays.
That’s why working with reliable suppliers who will ship your orders on time and follow your POs to a T is so necessary.
Congrats! You’ve reached the final step in the purchase order process (we know it can be lengthy one).
Now, it’s time for you to pay up. At this point, you’ll get an invoice for your order from the supplier and must pay the balance.
In a perfect world, invoices are issued after you’ve received the shipment from your supplier. But most brands must pay at least part of this invoice upfront (as a down payment). Then you’ll pay the rest of the invoice typically within net 60 days.
🧠 Keep in mind: While this is the optimal scenario for payment, things don’t always go as planned. In 2022, average supplier lead times hit upward of 100-150 days — well beyond those ideal net-60 payment terms.
And yet, retailers still have to pay their invoices on time — even if they haven’t received their goods. If brands refuse to pay up, they risk ruining the relationship (and reputation) with other suppliers. After all, no one likes working with a company that doesn’t pay its bills on time.
This whole situation means payment could be due way before your order arrives, leaving your brand with a negative cash flow or fully in the red. Brands paying for their order before it arrives can tie up your working capital and leave you in the lurch — especially as the cost of goods rises and supply chains continue to see delays.
🔥 Tip: Tools like Cogsy can help you budget what you need, and Settle can help you fund those inventory needs whenever you’re crunched for cash.
While PO creation is fairly straightforward, you might face a few challenges during this process.
Like it or not, doing tasks manually will never be as efficient as automation. You could spend several hours filling out a PO yourself — and it could take days of back and forth if you have to amend your order or related invoices.
When it’s all said and done, processing a purchase order manually can cost anywhere from $50 all the way up to several hundred dollars (per individual order). In fact, the American Productivity & Quality Center (APQC) found that manual processing costs businesses as much as $506.52 per PO on average.
In addition to being so time-consuming and expensive, manual POs are more likely to have errors in reporting or calculations, which further delays your orders.
On the other hand, automating POs with a tool like Cogsy bypasses these kinds of infuriating errors completely. Automation improves the accuracy of your orders by eliminating manual mistakes while organizing all your PO data in one centralized place. (All for a flat cost.)
Plus, when you handle your POs electronically, you can speed up communication and confirmation with your vendors. That way, you can complete several steps in the PO process with just a few clicks.
A minimum order quantity (MOQ) is the smallest number of units you have to buy in a single order from your supplier. Suppliers often set MOQs to save time, money, and materials on orders that offer little to no profit.
Sometimes, purchasing the minimum order quantity is your most cost-effective option — particularly if a supplier’s MOQ matches your customer demand. But be mindful that when suppliers set MOQs, it’s usually the required minimum number of units you have to order.
So, if the MOQ is way more than you need to fulfill demand, that supplier might not be a good fit for your business. And you’ll likely want to shop for another supplier with a lower MOQ. Doing this kind of bargain hunting for the right-fit MOQ helps you avoid racking up a bunch of holding costs from storing inventory you don’t need.
📝 Note: While it’s tough to negotiate MOQs down, you might be able to spread it out by placing smaller orders more frequently. That way, you’re fulfilling the supplier’s MOQ without receiving too much inventory all at once. Need help? Check out this comprehensive guide to negotiating vendor terms.
These days, Shopify’s market share accounts for about 33% of all ecommerce websites in the US. Meaning, about 1 in 3 online businesses in the US use Shopify to power their stores.
Despite it’s popularity, Shopify’s PO process isn’t very intuitive. And the success of your Shopify process hinges on accurate forecasts and timely purchase orders that consistently meet customer demand.
Fortunately, Cogsy helps you with both. Cogsy plays well with Shopify and simplifies the entire PO flow. Cogsy’s proactive sales predictions and inventory intelligence help you anticipate demand (and prepare accordingly), so you can send accurate POs with the right SKUs, products, and variants.
With Cogsy’s PO flow, Shopify merchants also get deeper visibility into their order status — from the moment they place a purchase order to the moment they receive it. And if that wasn’t enough, Cogsy also helps Shopify merchants create optimal POs at the click of a button. No Excel spreadsheets, guesswork, or self-doubt involved.
There’s always room for improvement — even with the most efficient PO process. Curious about how you can upgrade your PO management? Some of the best practices include using purchase requisitions and leaning on an inventory purchasing platform.
A purchase requisition (PR) is an official document submitted to the person on your finance team who controls funds within the PO approval process. This advanced approval cuts down on mistakes and redundancies, and it guarantees your ordering fits into your budget.
You’ll create these purchase requests whenever you need to replenish inventory and provide details about the products you want to order (like the number of items and the date you need to receive them).
Though they have some similarities, POs and purchase requests aren’t synonymous. The main difference is that you use a PR internally to get permission from your accounts payable department to place an order. In contrast, POs are external for you to actually order products from your suppliers.
Along those same lines, a purchase request can be a drafted PO you just slide across finance’s desk for approval. (Just mark that it’s not an official PO.) Easy, right?
Meaning, you can quickly draft an electronic purchase order using an end-to-end purchasing tool like Cogsy and then send that draft to your contact in finance to approve it. Once approved, you can remove that marking and officially submit it to your supplier.
When tools work together, you can take even more tasks off your to-do list. That’s why it’s wise to integrate the tools your brand relies on to create a single source of truth. This move alone can help you decrease stockouts and get a better read on your inventory levels.
For instance, Cogsy integrates with Shopify, Amazon, ShipBob, and more to store and monitor all your product insights in real-time, all in one place. That way, you’re always working with the most updated inventory info (since it’s being refreshed around the clock). This inventory visibility is the key to creating accurate forecasts — which also leads to more accurate purchase orders.
After all, your forecasts are the foundation for creating POs since they tell you the exact inventory you need to meet your current demand. So, integrating these tools only feeds your system of records more handy data, so it can build more accurate demand forecasts. (It’s a feedback loop with you in the center, reaping all the benefits.)
👋 TL;DR: Because inventory management systems keep close track of your stock levels, they can improve the accuracy of your forecasting and purchasing efforts.
Implementing cloud-based PO software puts you on the fast track toward success. This type of tool makes it easy to create, submit, and adapt your POs as often as needed — and it does all of this without tons of pesky data entry on your part.
Take Cogsy, for example. Cogsy is an end-to-end purchasing platform that streamlines how Shopify merchants and Amazon brands place purchase orders by removing any guesswork.
For instance, whenever you draft a PO, Cogsy provides specific, data-backed restock recommendations based on your brand’s historical sales, real-time inventory levels, and future forecasted demand.
You can use these recommendations as a guide so you only order what you need – nothing more, nothing less. Even better, you can even bulk-add these recommendations with a single click.
Thanks to this expedited purchasing process, DTC brands save an average of 20+ hours a week with Cogsy, which they can reinvest into growing their business. But how Cogsy can streamline your purchase order process doesn’t stop there.
Partnering with Cogsy is the smartest way to streamline your PO process and bypass bottlenecks in the supply chain.
Cogsy tracks your inventory levels in real-time. The moment you start running low, we’ll send you friendly replenish alerts, letting you know it’s time to restock.
These alerts are personalized to each SKU’s reorder point. That way, you always get them with enough time to place your next purchase order and for you to get that shipment before you stock out.
Say goodbye to guessing what inventory needs to be on your next purchase order.
Cogsy’s marketing events and growth planning features help you build smart inventory plans that address best-case, worst-case, and most probable scenarios. That way, you can plan for future inventory purchases and set aside the cash you’ll need.
When it’s time to place a purchase order, Cogsy will provide handy restock recommendations, based on these plans. Even better, these recommendations safeguard against potential human errors (like overestimating your inventory needs).
How exactly? By outlining what to order, how much, and where to send that inventory so you only invest in stock that will turn a profit.
(Remember: You can even bulk-add these recommendations and auto-fill vendor information to expedite how you build out POs.)
Cogsy houses all your important vendor need-to-knows (like contact info and contracts) in one place.
Work with multiple vendors? Coordinate your preferred vendors to clarify who provides what SKU. Every time you add items to your purchase orders, Cogsy will use these preferences to auto-fill the corresponding supplier information. That way, you always place orders with your most reliable supply chain partners.
Managing multiple purchase orders is… a lot. Luckily, with Cogsy, you can add multiple shipments to one PO. That way, you can procure all the inventory you need while placing fewer POs.
Even better, get a bird’s eye view of where all your purchase orders currently stand, from draft to delivery. So, you know what inventory is on its way and where it’s at.
Ready to overhaul your PO process and achieve maximum efficiency? Try Cogsy free for 14 days.
Though purchase orders and purchase requisitions share similarities, these documents aren’t the same. The main difference between the two is that purchase requisitions are used internally to get permission from your finance team to place orders. In contrast, POs are used for external communication (and approval) with your suppliers.
A sales order is a document that’s issued from the seller to the buyer and authorizes the quantity, quality, and price of goods being exchanged. A purchase order is issued from the buyer to the seller and includes details about the types and quantities of products needed (as well as information on payment terms and delivery timelines).
A purchase order is issued by a buyer and fulfilled by a supplier. It provides details about the products the buyer needs (plus payment terms and delivery dates). An invoice is a bill issued by a supplier and paid by the buyer. Typically, invoices are sent after a PO is fulfilled.
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