What Is a PO Number and How to Create It (+ Examples)

Introduction

In every business transaction between a buyer and a seller, the initial step that sets everything in motion is the issuance of a purchase order (PO). Purchase orders serve as a formal document issued by a buyer to a seller, outlining the details of goods or services they wish to purchase. 

With each purchase, a buyer sends a purchase order to the seller. This means that in scenarios with multiple orders or various buyers making purchases, multiple purchase orders are generated. So, while invoicing, how do businesses distinguish and identify which purchase order corresponds to which transaction? The answer lies in the unique identifier assigned to every purchase order: Purchase Order Number (PO number).

A PO number acts like a distinct code or reference for each order placed, allowing businesses to differentiate between multiple purchase orders easily. To understand this better, let’s discuss in detail what a PO number is and how it is used.

What Is a Purchase Order?

A purchase order is a formal written document that a buyer sends to the seller to detail all the specifics of goods or services that they want to purchase. It includes information such as item descriptions, quantities, agreed prices, delivery dates, and payment terms. 

Moreover, a purchase order ensures that both the seller and the buyer are on the same page. It also serves as proof of the transaction, which is useful for establishing a clear audit trail and providing legal protection by documenting the agreed-upon terms and conditions. 

What Information Is Added on a Purchase Order?

Typically, a purchase order consists of the details of the transaction, indicating the confirmation of the order along with the relevant information. It contains the following information:

1. Date created
2. Unique PO number
3. Vendor contact information (name, phone, email)
4. Buyer contact information and billing address
5. Description of products and services, including specific names
6. Quantity of each product or service
7. Agreed price with tax information

What Is a Purchase Order Number?

A PO (Purchase Order) number is a unique identifier assigned to a specific purchase order made by a buyer to a seller. The number helps in tracking and managing the business transaction as it includes details such as items purchased, quantities, prices, and delivery dates.

When a buyer creates a PO, they assign it a distinct number, generally sequential or alphanumeric, enabling easy tracking of order details. This number is included in all related documentation, such as invoices, delivery receipts, and correspondence, establishing a clear link between the initial purchase request and subsequent transactions.

In other words, the PO number streamlines the purchasing process and provides a reference point for communication and documentation between buyer and seller. Here’s an example of how a purchase order looks like:

Why Are PO Numbers Important?

Every business runs on accountability and trackability. The PO number is key in this equation, and here’s why:

1. Tracking Transactions: A PO number helps trace every step of a transaction, from order placement to product delivery and payment.
2. Financial Auditing and Record-keeping: They provide a systematic way to locate and verify transactions during audits. It’s like leaving breadcrumbs for your accountant.
3. Managing Orders and Dispute Resolution: PO numbers act as a common reference point between buyer and supplier, which can be particularly handy if disputes arise.
4. Streamlined Receivables: PO numbers allow quicker invoice processing and payment, reducing wasted time sifting through records.
5. Accurate Revenue Forecasting: They provide a clear view of pending orders and expected revenue, enabling more accurate cash flow projections.
6. Customer Relations: By ensuring accurate billing, PO numbers help prevent disputes and maintain healthy customer relationships. 

Why Is the PO Number Used in an Invoice?

A PO number is also included in the invoices that a seller sends to the buyer. The PO number is essential here as it directly links the purchase order and billing documentation.

When a buyer creates a purchase order with a PO number, they outline specific details such as the goods or services required, quantities, agreed prices, and delivery terms. This PO number assigned to each transaction serves as a unique identifier that ties together all aspects of the purchasing process. 

When the seller receives the PO, they prepare an invoice based on the information provided. The PO number is referenced on the invoice to confirm that the goods or services listed correspond exactly to what was requested by the buyer.

Therefore, using PO numbers in invoices enhances transaction tracking and management, while also improving transparency and accountability.

What Are PO Invoices and Non PO Invoices? 

PO invoices are generated based on a formal purchase order (PO) issued by the buyer. They detail specific goods or services, quantities, prices, and payment terms. The seller sends the invoice to the buyer by including the corresponding PO number for easy identification and payment processing. 

On the other hand, non-PO invoices are issued for transactions that do not originate from a formal purchase order. These invoices do not link to any purchase order numbers. Usually, such invoices correspond to urgent requirements or services that do not require a formal purchase order.

Where to Include a PO Number on an Invoice?

A PO number is included in an invoice in a prominent way, typically near the top or in the billing section for easy recognition. This ensures clear identification and linkage to the original purchase order, facilitating accurate payment processing and easy audit trail. 

Here’s an example to know where to include PO number in an invoice:

Practical Examples and the Structure of PO Numbers

To understand how a PO number works, let’s take an example. Say you’re a business purchasing 500 custom-printed T-shirts. The PO number example might look like this: PO2023-06-500T. Here’s how that breaks down:

• PO: Purchase Order
• 2023-06: Date of order (Year-Month)
• 500T: Unique order identifier (Quantity and Product Initials)

By using this number, you can easily track and manage various aspects of the purchase order process, including order tracking, financial recordkeeping, audit trails, etc. 

Variations of PO numbers across business industries

While the core purpose of PO numbers remains the same, their format and structure can vary across industries. For instance:

Manufacturing: 

PO numbers may include codes denoting specific product lines or product categories. For example, a company manufacturing electronic goods might use a PO number like PO2023-ELEC-100. Here, ‘ELEC’ signifies the product category (electronics), and ‘100’ denotes the quantity.

• PO: Purchase Order
• 2023: Year of order
• ELEC: Electronics category
• 100: Quantity of order

Retail: 

A PO may incorporate identifiers for the season or product type. For example, a clothing retailer ordering winter clothes in October might use a PO number such as PO2023-WC-OCT-50. ‘WC stands for winter clothes, ‘OCT’ stands for the month, and ’50’ stands for the quantity.

• PO: Purchase Order
• 2023: Year of order
• WC: Winter Clothes category
• OCT: Month of order (October)
• 50: Quantity of order

Service Industries: 

PO numbers might include codes related to the type of service provided. For example, a company ordering IT services might use a PO number like PO2023-IT-JUL. ‘IT’ denotes the service type, and ‘JUL’ indicates the month.

• PO: Purchase Order
• 2023: Year of order
• IT: IT Services
• JUL: Month of order (July)

How to Create a PO Number?

As there is no standard for creating a PO number, the right process for generating one and its format may vary depending on the organization’s preferences. PO numbers are usually generated either manually or using automation solutions.

• Generating manual PO numbers

  Generating manual PO numbers involves creating unique identifiers for purchase orders without relying on automated systems. This approach is common in smaller businesses or for individuals. The process begins by defining a numbering system—sequential or alphanumeric—that best fits the organization’s needs for tracking and referencing orders. 

  For instance, a small retail business owner may decide to implement a sequential numbering system for its Purchase Orders (POs). It starts with ‘PO-1001’ for their first order. As the business processes subsequent orders, it increments the number sequentially: ‘PO-1002’, ‘PO-1003’, and so forth. Optionally, the owner may choose to add the date of issuance in a standardized format like YYMMDD at the end of the PO number to further enhance clarity and facilitate easier reference (e.g., ‘PO-1001-220722’ for an order issued on July 22, 2022).

  Each PO number must be unique to avoid confusion, with manual recording and issuance ensuring accuracy.

• Generating automatic PO numbers

  These are automatically generated by a software or a system without manual intervention. This method is widely used in larger organizations or those with integrated procurement management systems. 

  For this, businesses utilize ERPs or accounting software and solutions that can automatically generate unique PO numbers sequentially or based on predefined rules, ensuring each order is easily identifiable and traceable.

  Automation helps businesses ensure accuracy and eliminate manual errors, enhance efficiency in procurement processes, and facilitate accurate tracking of transactions from initiation to fulfillment.

Some points to remember

While every company might have its nuances, setting up a PO number system involves these steps:

1. Create a Structure: Decide on a format that fits your needs. It could be numerical, alphabetical, or a combo. Just make sure it’s scalable.
2. Consider Automation: Tools like ERP or accounting software can automate PO number creation, saving time and reducing errors.
3. Maintain Consistency: Ensure every PO follows the same format regardless of the method. Consistency is key to easy tracking and management.

Conclusion

The purchase order number is an essential component in the purchase order that facilitates easy identification of the corresponding order details. 

Each business can have its unique way of structuring PO numbers. The main point is to make it unique and meaningful for easy tracking and order identification. You can easily incorporate this structure into your PO generation process using an accounting system to automate invoicing.

FAQs

1) Does an invoice need a PO number?

In B2B transactions, invoices should ideally have a PO number. The PO number links the invoice directly to the initial purchase order, providing a clear reference point for both the buyer and the seller. It helps both parties track the transaction and streamlines the invoicing process.

2) What is the difference between a PO number and an invoice number?

A PO number is issued by a buyer to a seller to initiate a purchase of goods or services, serving as a unique identifier. On the other hand, an invoice number is assigned by the seller to the buyer after goods or services have been delivered or completed as per the terms of the purchase order.

3) What is the difference between PO Invoices and Non-PO Invoices?

PO invoices are tied to a purchase order and are mostly used for pre-approved purchases. Non-PO invoices, which are not linked to a prior purchase order, are often used for ad hoc or unexpected purchases.

4) Is PO Number a Contract?

No, a PO number is not a contract itself. It serves as a reference number for a specific purchase order, detailing terms, quantities, prices, and other things agreed upon by the buyer and seller. The contractual agreement is documented separately within the terms and conditions accompanying the PO.

5) How is the PO Number Generated?

PO numbers are generated by the buyer at the time of creating a purchase order. The purchase order number can be generated manually by assigning a unique identifier or automatically through specialized PO system generators, ensuring consistency and efficiency in tracking orders.