In the world of small business you will come across the concept of a purchase order number, PO number for short. PO numbers are a crucial detail for purchase orders and invoicing. This is why we have compiled this short guide to what a PO number is, why you need it, how to create one, and what the difference between a PO and an invoice number is.
What is a PO Number?
A purchase order number refers to a unique number assigned to a purchase order. A purchase order is a document buyers send to sellers to detail goods and services they require. The order needs to be approved by the seller to be a legally binding document. There is a number of elements on a purchase order, including the date of the order, a description of goods and services to be purchased, quantities, and payment terms. One of those elements is the unique PO number.
A PO number is a unique reference code that is assigned by the buyer of the goods or services in question. The code can either be created manually or automatically by your software. The number helps identify and track the order. The option to create PO numbers will often be a feature of large accounting software.
Why do I need a PO number?
There are several reasons why PO numbers can make your life easier. This includes:
- Tracking inventory: PO numbers help ensure that you have an overview of what has been ordered in your business.
- Tracking payments: PO numbers can help keep an overview of what is due to be paid by each client.
- Price structuring: PO numbers help ensure that prices are agreed upon clearly and there is a paper trail to prove what was agreed upon.
- Legal requirement: Once a purchase order is agreed upon by the seller, it becomes legally binding.
- Accounting errors: PO numbers can help avoid accounting errors, such as duplicate payments or incorrect filling.
How do I create a PO Number?
There are two main approaches you can take to create a purchase order number:
- Manual: A small business, such as sole traders and SMEs, with few purchase orders, can feasibly implement a manual system of creating PO numbers. When creating the numbers, you can use letters and numbers alike. A common system is moving up sequentially, starting with e.g., PO 00001 and moving onto PO 00002 after. If you are creating PO numbers manually, it may be advisable to collect them in a spreadsheet to ensure you do not use the same number twice.
- Automatic: As a larger company and if you deal with regular purchase orders, it may be advisable to create your purchase order numbers automatically. This avoids duplications and saves you and your team a lot of work. Your accounting software may have a function to do this. Several cloud accounting solutions offer this.
Once you have created a PO number, it is usually written on the top of a purchase order. You can also use a purchase order template. There are several templates available online.
PO number vs. Invoice Number
It is important not to get PO numbers and invoice numbers confused. There is a fundamental difference in the purpose they serve and the documents they are found on.
- When a customer places an order, a purchase order is created. This purchase order describes the goods and services ordered and is marked with a PO number. This number helps identify and track the order.
- Invoices, on the other hand, are created once the order is complete. The invoice document is marked with an invoice number.
- The PO is a contract over a sale while the invoice confirms the sale. Buyers use PO numbers to track an order and sellers use invoice numbers to identify a (paid) invoice.
- Both the invoice and the purchase order are legally binding documents.
- When should I create a PO number?
When the buyer decides to purchase a service or goods, a purchase order is created. For this, a purchase order number is required and either created automatically or manually.
- How much does a PO number cost?
Creating a PO number comes with no cost of its own. You can create them manually. However, if you are a large company, it may be worth using accounting software to generate your PO numbers. Software does come with a cost but has useful features for your business.
- How many digits is a PO number?
It is recommended that PO numbers are between four and six characters long.