Purchase Order

A purchase order is a document issued by a buyer to a supplier that formally authorises the purchase of specific goods or services at an agreed price. It is created before the goods are delivered or the services performed, making it a pre-commitment control: a record that spending was authorised before the obligation was incurred.

In AP terms, the purchase order is the foundation of invoice matching. When a supplier invoice arrives, it can be compared against the original purchase order to verify that the goods were ordered, that the quantities and prices match, and that the supplier is one the business has an approved relationship with. Without a purchase order, this comparison cannot happen, and the invoice approval process must rely on the approver's memory or informal verification.

What a purchase order must contain

An effective purchase order contains the following: a unique PO number for reference and matching, the date it was issued, the supplier's name and details including ABN, a description of each item or service being ordered, the quantity and agreed unit price, the total order value including GST, the delivery address, the expected delivery date, and the name of the person or department that authorised the purchase.

In Australian businesses, the PO also needs to reference the relevant cost centre or job code if the purchase is being allocated to a specific project or department. This coding at PO stage reduces the work required when the invoice arrives, since the account coding can be inherited from the PO rather than assigned again manually.

How purchase orders function as a financial control

The primary control function of a purchase order is preventing unauthorised spending. If your business requires a PO to be raised and approved before any goods or services can be ordered, then no supplier invoice should arrive without a corresponding approved PO. An invoice that arrives without a PO reference becomes an immediate exception: something that requires explanation before it can be processed.

This control is particularly valuable in businesses with multiple people who can place orders, such as construction companies where site managers order materials directly, or wholesale distributors where buyers across different categories each manage their own supplier relationships. Without PO discipline, the AP team has no way of knowing whether an arriving invoice was legitimately ordered or is a duplicate, a fraudulent submission, or a charge for something never received.

Purchase orders and PO matching

PO matching is the process of comparing a supplier invoice to the original purchase order before approving payment. Two-way matching compares the invoice to the PO on price and quantity. Three-way matching also compares the invoice to a goods receipt note, confirming that delivery occurred before payment is approved.

For Australian businesses with high invoice volumes and multiple suppliers, PO matching reduces the manual checking required at approval stage. Rather than asking an approver to verify from memory whether an invoice is legitimate, the system flags any invoice that does not match its PO within a defined tolerance. The approver reviews exceptions rather than every invoice, which is both faster and more reliable.

When purchase orders are not practical

Not every business uses purchase orders for every purchase. Service businesses, professional services firms, and businesses with a small number of well-established suppliers sometimes manage without formal POs. The risk trade-off is acceptable when invoice volumes are low and the approver has direct knowledge of every supplier relationship. As the business grows, the absence of PO discipline becomes an increasingly significant control gap.