2 min read
Why a formal purchase order system matters
Issuing a purchase order before a supplier delivers goods or services creates a documented, dated record of what was ordered, at what price, and under what terms. Without POs, companies commonly face disputed invoices, unauthorised spend, and an inability to demonstrate to auditors or lenders that liabilities on the balance sheet correspond to genuine, approved business expenditure.
For companies with external lending facilities, lenders and auditors increasingly expect to see a functioning PO system as evidence of sound financial controls. A three-way match process — reconciling the PO against the delivery note and the supplier's invoice before payment is approved — is the AP best practice standard that most commercial accountants will recommend.
Essential fields in a purchase order template
- Your company name, registered address, and company number
- Unique sequential PO number
- PO date and required delivery date
- Supplier name, address, and contact
- Delivery address (if different from registered address)
- Line-by-line description of goods or services, quantity, unit price, and line total
- Total net amount, VAT rate and amount, and total gross amount
- Payment terms and preferred payment method
- Your company's standard terms and conditions (or reference to them)
- Name and signature of authorising manager
- Budget code or cost centre reference
Authorisation levels and spend controls
A purchase order template is most effective when supported by a documented authorisation matrix that specifies which individuals may approve POs up to defined value thresholds — for example, department managers to £5,000, finance director to £25,000, and board approval above that. The thresholds and the names of authorised signatories should be reviewed annually and updated when personnel change.
POs raised above the relevant authorisation limit without the required approval represent a control failure and may constitute a breach of company financial policies. If your company is subject to a facility agreement that includes financial covenant provisions, unauthorised commitments could also be relevant to reporting obligations. Your accountant or company secretary can assist in drafting an authorisation policy.
Frequently asked questions
Is a purchase order legally binding on the supplier?
A purchase order is a legal offer by your company to purchase goods or services on stated terms. It becomes a binding contract when the supplier accepts it — either expressly in writing or by conduct, such as dispatching goods or commencing work. If the supplier responds with their own terms and conditions, those terms may govern instead (the 'battle of the forms'). For significant purchases, take legal advice on which terms apply.
What should happen when an invoice arrives without a matching PO?
Invoices without a matching PO number should be placed on hold and not approved for payment until either a retrospective PO is raised with proper authorisation, or the invoice is rejected and returned to the supplier. Processing invoices without PO matching undermines spend controls and creates audit trail gaps. Establish a clear policy for handling exceptions and communicate it to both staff and key suppliers.
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