It’s tempting to order inventory in advance just in case you sell out. But businesses are sitting on $1.40 worth of inventory for every dollar in sales—a type of bloating that can happen for many reasons. One of them is losing track of orders you’ve made to suppliers, leaving you with high inventory levels and storage costs to match.
Creating and tracking purchase orders is one way to reduce this problem.
A good purchase order system makes it easier to forecast demand and order future stock, improve cash flow, and prevent any order errors that arise throughout the order process.Read on to learn what a purchase order is, how to create one, how to manage purchase orders, and to download a free PO template.
What is a purchase order?
A purchase order (PO) is an official document in which your retail store commits to purchase goods from a supplier or vendor. It includes names of both the buyer (your store) and the vendor, company information, and the quantities of products being purchased.
For example, if you’re sourcing 500 t-shirts for your apparel stores, you’d send a PO to the manufacturer as your commitment to purchasing that quantity of stock from that vendor.
While it sounds like another unnecessary step in the ordering process, creating a purchase order for the goods you’re about to buy helps track incoming inventory. Not only will you know which SKU quantities you’ve ordered from each vendor, you’ll also be able to use your PO information to understand cash flow. The sum of your outstanding purchase orders is money you’ve committed to pay to suppliers over the next few months.
The vendor also uses a PO to get things in place so they can deliver the quality and quantity of goods ordered by the buyer on a specific date.
How to create purchase orders
Every purchase order needs the following information:
- PO date
- PO number
- Delivery date
- Shipping method
- Buyer information (company name, email address, shipping address)
- Vendor information (company name, email address, and billing address)
- Items being ordered (SKU or item number, description, quantity of items, and price)
- The total price
- Tax information
Purchase order example
Here’s an example of what a PO might look like for a retail store. The document outlines the vendor’s information, the items being ordered, the quantities, and the shipping terms.
Use a free purchase order template
Need help creating your own PO? Use Shopify’s free purchase order template. Enter the required information—including your store address, vendor company information, and items ordered—to get an electronic purchase order sent directly to your email address, ready to forward to vendors.
Types of purchase orders
Standard or single-use purchase orders
A standard purchase order is the most common type of PO. It’s used for one-off purchases. If you’re ordering 500 pens from a vendor in preparation for a pop-up shop, for example, you’d use a single-use purchase order.
Planned purchase orders
A planned purchase order is created when you have repeat or regular orders with a vendor. Let’s say you plan to buy 1,200 units from a manufacturer, but instead of purchasing them all at once, they’re broken down into orders of 200 units for the next six months. You’d have six planned POs.
Blanket purchase orders
A blanket purchase order is the most vague type. It’s an agreement between a buyer and vendor to exchange goods in return for payment, but with the specifics still to be confirmed. You might use a blanket PO with a trusted manufacturer.
Contract purchase orders
A contract purchase order isn’t necessarily an official PO; it doesn’t contain any specific information relating to products being purchased. It’s more a blanket agreement between a buyer and vendor that clarifies delivery, tax, and payment terms for any future orders. Another type of PO—be that a planned, single-use, or blanket PO—will follow.
How to manage and track purchase orders
Now that you know how to create purchase orders, let’s look at how to manage and track them for your retail store.
Purchase order process
- You decide to purchase new inventory.
- You draft a purchase order explaining the products you want to purchase, the quantities of each product, the delivery date, and your budget.
- You send the PO to your ideal vendor.
- The vendor accepts to fulfill the order outlined in the PO (or cancels it if they’re unable to).
- The vendor creates a packing slip based on your purchase order details and fulfills the order by manufacturing and shipping it to your store. The PO number is listed on the shipping package so you know when it has arrived.
- The vendor converts the PO into an invoice.
- You pay the vendor according to the payment terms detailed on their invoice.
Who issues purchase orders?
The buyer is responsible for issuing purchase orders. If you’re ordering inventory for your retail store, for example, it’s your job to create the PO. If you’re fulfilling an order for another business, it’s their job to issue a PO.
Depending on the size of your store, you might have a finance department, purchasing department, or accounts payable team who issues purchase orders. If not, the business owner or store manager usually takes this responsibility.
Who approves purchase orders?
The vendor—be that a manufacturer, contractor, or otherwise—is responsible for approving purchase orders. If you’ve issued a PO for the inventory you’re ordering from a vendor, for example, it’s their job to approve it.
Once approved, the PO becomes a legally binding contract. You’re officially committed to pay that vendor for the goods outlined in the purchase order.
How to track purchase orders
There are various ways to track purchase orders. Excel spreadsheets are often the first choice for businesses just coming to grips with them. The only problem? They’re clunky, confusing, and get inaccurate fast—especially if you forget to update the spreadsheet once a PO has been issued, approved, or converted into an invoice.
Ditch the spreadsheets in favor of a PO management system. Apps like Stocky sync with your Shopify store so you can create and track POs from your back office.
Upload company information for each vendor you’re working with. When you need to create a new PO, select the vendor. Stocky will create a PO with its contact information prefilled. Just copy and paste the terms of the PO—the items being ordered, quantities, and delivery dates.
The best part? You’ll never get caught up and unknowingly overspend. See how much money you owe each vendor in real time using the PO reporting dashboard.
💡 PRO TIP: Having trouble knowing how much stock to order from a vendor? Merchants using Shopify POS can use Stocky’s demand forecasting feature, which uses historical sales data to suggest which products and quantities to reorder.
The benefits of using purchase orders
- Track incoming orders
- Avoid duplication
- Prevent order errors
- Legal documentation
- Improve efficiency
- Support scaling
Track incoming orders
Inventory replenishment planning is tough, especially if you’re stocking large quantities of SKUs. “Did I forget to restock this product for next month?” might be a question swirling around in your head as you circle the shop floor.
💡 PRO TIP: To prevent stockouts, set reorder points in Shopify admin to get low stock notifications. These ensure you have enough lead time to replenish a product’s inventory before quantities reach zero.
However, using a purchase order system shows all upcoming orders, so you know exactly what expenses you’re paying out and which items you’ve ordered. Inside Stocky, the PO report details:
- The vendor you’ve sent a PO to
- The total cost
- The product(s) you’ve ordered
- When the products are expected to arrive
- Whether you paid the invoice a vendor provided
You can even set stock level restrictions for each vendor inside Stocky. If you try to create a PO for 80 items but your vendor has a minimum order requirement of 100, for example, the PO will be updated to reflect that. No back-and-forth delays needed.
Did you already place an order for next month’s inventory? By implementing POs into your buying process, one look inside your PO system will show the answer—preventing you from buying the same merchandise twice.
Prevent order errors
If you’re making orders over the phone, it’s only a matter of time until something gets misinterpreted or misheard. A manufacturer thinks you ordered 90 t-shirts when, in fact, you’d said you needed 19. You get a gigantic order delivered to your store and an expensive invoice to follow.
According to Daniel Carter, SEO Manager of Skuuudle, “To precisely explain all the facts of purchase, purchase orders give a record of exactly what you ordered and at what price. This type of paperwork protects you from any ordering errors, such as someone misinterpreting an order done over the phone.”
“When there’s a disagreement regarding what was or should have been ordered, your team can refer to POs. Having this documentation gives you a valuable tool for resolving internal errors as well as issues that arise between you and your vendors," Carter adds.
As soon as a PO has been approved by a vendor, you’re legally obligated to pay them the amount detailed for the products included. While it might sound scary, it’s advantageous for you as the buyers because you can order new merchandise without paying right away. Cash flow immediately gets better. You have a longer cycle to generate enough profit to pay for future stock.
The same legal protection applies to the vendors you’re sending POs to. They’re confident in delivering the products you’ve ordered for your store since they know an invoice and payment will follow.
Inventory management is a time consuming process. It’s also the activity that keeps your retail store afloat. No inventory equals nothing to sell, totalling $0 in revenue.
Purchase orders make inventory management processes more efficient. As part of your PO workflows, you’ll understand stock levels and track the costs of items you’re ordering from vendors. Patterns will appear over time.
Let’s say before you implement POs, you make an order of 200 units each month. Some months you sell out; others you’re stuck with a little longer. The new PO system shows existing inventory levels alongside your new order quantities. So, if you find you have 150 units left over from last month, change this month’s PO to 50 units. You’ll prevent bloating your inventory and accumulating large stock volumes that become increasingly harder to shift.
As a small retail business, ordering stock might not feel like much work. But if you plan to scale your product line as your customer base grows, POs make that process easier. The responsibility doesn’t fall on you to organize upcoming orders, prevent duplicates, and correct order errors.
Using purchase orders—and a system to organize them—gets your foundations right. Train new retail staff on how to use your purchase order form. Create automations to generate one when top performing stock dips below a certain level. In the future, hire a finance department who approves the POs and prevents overspending. It’ll make things easier in the long run.
Are purchase orders right for your retail store?
Purchase orders help retailers track incoming orders, commit to stock further in advance, and prevent order discrepancies. They also provide legal documentation should something go wrong in your supply chain process.
Determine the type of PO you need for your business, then use a purchase order system like Stocky to create them. It’ll make scaling your retail store easier and contribute to balanced inventory levels.
Additional research and content from Alexis Damen.