The Ultimate Guide to Understanding Purchase Order Numbers: Everything You Need to Know

The Ultimate Guide to Understanding Purchase Order Numbers: Everything You Need to Know

The Ultimate Guide to Understanding Purchase Order Numbers: Everything You Need to Know

If you’re new to the world of purchasing and procurement, you may have come across the term “Purchase Order Numbers“, sometimes shorted to just “PO Numbers“, and wondered what they are and why they are important.

In this comprehensive guide, we will unravel the mysteries of purchase order numbers and equip you with everything you need to know to navigate this essential aspect of procurement. Purchase Order numbers are not to be confused with Sales Order Numbers. I have written a separate article about the difference between a Purchase Order and a Sales Order.

Purchase order numbers serve as unique identifiers for each purchase order made by a company. They not only help streamline the purchasing process but also play a crucial role in tracking orders, managing budgets, and ensuring accurate record-keeping. Understanding how purchase order numbers work is essential for both buyers and suppliers to maintain efficient and transparent transactions.

In this guide, we’ll delve into the purpose and structure of purchase order numbers, explore how they are generated, and discuss their significance in various industries. Whether you’re a business owner, a procurement professional, or simply curious about the purchasing process, this guide will provide you with valuable insights to navigate the world of purchase order numbers with confidence. So, let’s get started!

Why is a Purchase Order important?

A purchase order is a legally binding document that outlines the details of a transaction between a buyer and a seller. It serves as a contract between the two parties, specifying the products or services to be purchased, the agreed-upon price, delivery terms, and other relevant information. Having a purchase order in place ensures that both the buyer and the seller are on the same page and helps prevent misunderstandings or disputes.

When it comes to purchase order numbers, they play a crucial role in the purchasing process. They provide a unique identifier for each purchase order, making it easier to track and manage transactions. Purchase order numbers enable both buyers and suppliers to efficiently communicate and refer to specific orders, ensuring that the right products or services are delivered on time and in the correct quantity.

Additionally, purchase order numbers provide a means for accurate record-keeping. They allow businesses to maintain a comprehensive history of their purchasing activities, which can be invaluable for budgeting, financial analysis, and auditing purposes. With purchase order numbers, companies can easily trace back their orders, track expenses, and identify any discrepancies that may arise.

If your business takes payment in cash, charge cards or credit cards you probably don’t need to ask the customer for a Purchase Order Number. PO Numbers are most frequently used where goods and services are being provided on a credit basis and where the supplier will send an invoice to the customer later. When the invoice is sent to the customer it will quote the customer’s Purchase Order Number. This allows the customers to reconcile the invoice with the purchase and authorise payment. I have written an article about Invoice Reconciliation which goes into much more detail.

What is a Purchase Order Number (PO Number) and how do purchase order numbers work?

A purchase order number, often referred to as a PO number, is a unique alphanumeric or simply numeric code assigned to each purchase order. It serves as a reference number that helps identify and track a specific order throughout the procurement process.

Purchase order numbers are generated by the buyer and shared with the supplier to ensure smooth communication and accurate order fulfilment, receipt and payment processes. (this is sometimes referred to as the Purchase to Pay process from the customer perspective and the Order to Cash process from the selling perspective.)

The structure of purchase order numbers can vary depending on the organization’s preferences and systems. Some companies use simple sequential numbers, while others incorporate additional information such as dates, project codes, or supplier codes. Regardless of the format, purchase order numbers are designed to be easily recognizable and distinguishable from one another.

Purchase Order Numbers will be unique and sequential within each company. However many companies could use the same Purchase Order Number. Keep this in mind if you need to search your Sales Order System by Purchase Order Number. In that case, it is best to also filter by customer.

The process of generating purchase order numbers typically involves the following steps:

1. Establishing a numbering system: Companies need to define a standardized numbering system for their purchase orders. This may involve deciding on the format, length, and any additional information to be included in the purchase order numbers.

2. Assigning unique numbers: Each time a purchase order is created, a unique number is assigned to it. This number should be distinct from any other purchase order numbers previously generated by the company.

3. Communicating the purchase order number: Once the purchase order number is assigned, it must be shared with the supplier. This can be done through various channels such as email, electronic procurement systems, or printed documents.

By following this process, companies can ensure that purchase order numbers are systematically generated, communicated, and utilized throughout the purchasing process.

Different formats of purchase order numbers

Purchase order numbers can be structured in various formats, depending on the company’s requirements and preferences. Here are some common formats used by organizations:

1. Sequential Numbers: This format involves assigning a unique number to each purchase order in a sequential manner. For example, the first purchase order may be assigned the number “PO-001”, the second one “PO-002”, and so on. Sequential numbers are simple and easy to understand, making them a popular choice among small businesses or those with straightforward procurement processes.

2. Date-based Numbers: In this format, the purchase order numbers are generated based on the date when the order is created. For instance, a purchase order created on January 15, 2022, may have the number “PO-011522”. Date-based numbers can help identify the order’s timeframe quickly and are useful for companies that handle a large volume of purchase orders.

3. Project-based Numbers: Some companies incorporate project codes or identifiers into their purchase order numbers. This format helps link the purchase orders to specific projects or initiatives within the organization. For example, a purchase order related to a marketing campaign may have the number “PO-MKT-001”. Project-based numbers provide additional context and facilitate better organization of purchase orders.

4. Supplier-based Numbers: In certain industries, it is common to include supplier codes or identifiers in the purchase order numbers. This format helps identify the supplier associated with each purchase order. For instance, a purchase order from a specific supplier may have the number “PO-SUPPLIERXYZ-001”. Supplier-based numbers assist in streamlining communication and tracking orders with multiple suppliers.

Organizations need to choose a purchase order numbering format that aligns with their specific needs and ensures clarity and consistency throughout the procurement process.

I recommend that you keep your Purchase Order Numbers less than 35 characters long. 35 was established as the maximum Purchase Order Length several years ago when the United Nations defined the EDIFACT EDI (Electronic Data Interchange) message standard for Electronic Purchase Order Numbers. Since then this has been the maximum length supported in most Purchasing and Accounting systems.

Is it normal to have a Purchase Order number for every line on a Purchase Order?

In some sectors, customers will have a Purchase Order Number for the whole order (what we call at header level) and a separate Purchase Order Line (POL) Number for each line. This is usually done where the items on the order will be back ordered and supplied over several deliveries. It makes it easier to track individual lines for both the buyer and the seller.

How to get a purchase order number from the client

If you are a supplier or service provider, obtaining a purchase order number from your client is a critical step in initiating the order fulfilment process, from Order to Cash runs smoothly – unless they are happy to pay cash or on a credit card.

From a Sales perspective, you need to make it clear to your reps/agents that they don’t have an order until they have an official Purchase Order Number from the client.

Here are some steps to follow to obtain a purchase order number from your client:

1. Confirm the requirement: Before requesting a purchase order number, ensure that your client requires one for their procurement process. Some clients may have specific procedures or thresholds for issuing purchase order numbers. If in doubt, reach out to your client’s procurement or purchasing department to clarify their requirements.

2. Provide necessary information: When requesting a purchase order number, provide your client with all the necessary details about the products or services you will be supplying. This includes item descriptions, quantities, agreed-upon prices, delivery dates, and any other relevant information. The more accurate and comprehensive the information you provide, the smoother the purchasing process will be. This will often be in the form of a formal quote.

3. Request the purchase order number: Once you have gathered all the required information, formally request a purchase order number from your client. This can be done through email, a designated procurement portal, or any other communication channel specified by your client. Clearly state the purpose of your request and provide all the relevant details to facilitate the issuance of the purchase order number.

4. Follow up and track the purchase order: After requesting the purchase order number, it’s important to follow up with your client to ensure timely issuance. Once you receive the purchase order number, make sure to record it in your system and use it as a reference for all future communication and transactions related to the order. Regularly track the progress of the purchase order to keep both parties informed and ensure smooth order fulfilment.

By following these steps, suppliers can effectively obtain purchase order numbers from their clients, streamlining the procurement process and fostering efficient collaboration.

I generally advise companies to not commence the supply of goods and services until you either have a cash or credit card payment or an official purchase order number and you are certain that the customer is credit-worthy. To put it another way, in my experience you will find it hard to get paid by a large business if you haven’t got their PO Number to quote on your invoice.

Also, see my article about invoicing customers.

Common mistakes to avoid with purchase order numbers

While purchase order numbers are essential for efficient procurement, there are some common mistakes that businesses should avoid to maintain accuracy and effectiveness. Here are a few mistakes to watch out for:

1. Missing or incorrect purchase order numbers: One of the most common mistakes is failing to include a purchase order number or using an incorrect one in communication or documentation. This can lead to confusion, delays, or even the wrong products or services being delivered. Always double-check the accuracy of the purchase order number before referencing it in any correspondence or transactions.

2. Skipping sequential numbering: If your organization uses sequential purchase order numbers, it’s important to maintain the correct sequence. Skipping numbers can create discrepancies and make it challenging to track and manage orders accurately. Ensure that purchase order numbers are generated and assigned sequentially without any gaps or duplicates. Larger businesses will find that their auditors will check for gaps in their PO Number ranges and they will want any missing PO Numbers explained.

3. Lack of consistency: Consistency is crucial when it comes to purchase order numbers. Ensure that the numbering format and structure are consistent across all purchase orders within your organization. This helps avoid confusion and facilitates efficient record-keeping and analysis. Implementing standardized templates or using purchase order management software can help maintain consistency.

4. Not updating or closing purchase orders: Purchase orders should be regularly updated and closed once the transaction is complete. Failing to update or close purchase orders can lead to inaccurate financial records, difficulties in tracking order status, and unnecessary clutter in the system. Establish clear protocols for updating and closing purchase orders to ensure accurate and up-to-date procurement records.

By being aware of these common mistakes and implementing proper procedures and checks, businesses can avoid costly errors and maintain smooth procurement processes.

Best practices for managing purchase order numbers

To ensure effective management of purchase order numbers, organizations should adopt best practices that promote accuracy, efficiency, and transparency. Here are some best practices to consider:

1. Establish a standardized numbering system: Create a standardized numbering system that aligns with your organization’s needs and ensures consistency. Define the format, length, and any additional information to be included in the purchase order numbers. Having a standardized system simplifies tracking, referencing, and analysis of purchase orders.

2. Automate the generation and assignment process: Utilize purchase order management software or enterprise resource planning (ERP) systems to automate the generation and assignment of purchase order numbers. Automated systems save time, reduce errors, and provide a centralized repository for managing purchase orders.

3. Implement validation checks: Incorporate validation checks in your purchase order management system to ensure the accuracy and integrity of purchase order numbers. These checks can include verifying the format, uniqueness, and sequence of the purchase order numbers generated. Validation checks help identify errors or inconsistencies early on, preventing issues down the line.

4. Maintain proper documentation: Keep a comprehensive record of all purchase orders, including the corresponding purchase order numbers. This documentation should include details such as the date, supplier information, items ordered, quantities, pricing, and any related communications. Proper documentation facilitates audits, analysis, and dispute resolution.

5. Train and educate staff: Provide training and education to staff members involved in the purchasing process. Ensure they understand the importance of purchase order numbers and the proper procedures for generating, referencing, and updating them. Well-informed staff members contribute to accurate and efficient procurement practices.

6. Regularly review and analyze purchase order data: Periodically review and analyze purchase order data to identify trends, opportunities for improvement, or potential issues. Analyzing data can provide insights into supplier performance, pricing trends, order accuracy, and other key metrics. Use this information to optimize procurement processes and enhance decision-making.

7. Have a solid process for cancelling Purchase Orders which are no longer required. You should formally communicate the cancellation to the supplier and close the Purchase Order on your system.

8. Have a good process to Void any Purchase Orders which were raised in error or which failed the authorisation process.

9. Establish clear Purchasing Limits for each manager and a Purchase Order Approval Process.

By implementing these best practices, organizations can effectively manage purchase order numbers, streamline procurement operations, and foster transparent and efficient transactions.

How to create a purchase order number

Creating a purchase order number involves establishing a standardized format and adhering to certain guidelines. Here’s a step-by-step process for creating purchase order numbers:

1. Determine the format: Decide on the format of your purchase order numbers based on your organization’s requirements and preferences. Consider factors such as sequential numbering, date-based numbering, or incorporating additional information like project codes or supplier codes.

2. Define the length: Determine the length of your purchase order numbers. Typically, purchase order numbers are alphanumeric and range from 5 to 10 characters. Longer purchase order numbers may provide more flexibility for incorporating additional information, but keep in mind that excessively long numbers can become cumbersome to manage.

3. Establish a prefix or identifier: Consider adding a prefix or identifier to your purchase order numbers to distinguish them from other types of reference numbers used within your organization. This could be a combination of letters or a specific code that represents the purchasing department or the organization as a whole.

4. Ensure uniqueness: Purchase order numbers must be unique to avoid confusion and facilitate accurate record-keeping. Implement a mechanism, such as an automated system or manual checks, to ensure that each purchase order number generated is distinct from any previously assigned numbers.

5. Communicate the format: Once you have established the format and guidelines for your purchase order numbers, communicate them to all relevant stakeholders. This includes staff members involved in the purchasing process, suppliers, and anyone else who may need to reference or generate purchase order numbers.

By following these steps, organizations can create purchase order numbers that are consistent, unique, and easily recognizable, ensuring efficient procurement practices.

Tools and software for managing purchase order numbers

To streamline the management of purchase order numbers, organizations can leverage various tools and software solutions. Here are some popular options:

1. Enterprise Resource Planning (ERP) Systems: ERP systems, such as SAP, Oracle, or Microsoft Dynamics, often include modules dedicated to procurement and supply chain management. These systems provide comprehensive features for generating, tracking, and managing purchase order numbers, along with other procurement-related functionalities.

2. Purchase Order Management Software: There are numerous specialized software solutions available specifically designed for purchase order management. These tools offer functionalities like automated purchase order generation, tracking, approvals, and integration with other business systems. Examples include Procurify, TradeGecko, and Zycus.

3. Electronic Procurement Systems: Many organizations use electronic procurement systems or e-procurement platforms to streamline their procurement processes. These platforms often include features for generating and managing purchase order numbers electronically, facilitating seamless communication between buyers and suppliers. See my article on PEPPOL and EDI.

4. Microsoft Excel or Google Sheets: For smaller businesses or those with simpler procurement processes, spreadsheet software like Microsoft Excel or Google Sheets can be utilized to manage purchase order numbers. Creating customized templates with formulas and formatting can help automate certain aspects of purchase order management.

5. Custom-built Solutions: In some cases, organizations may opt for custom-built solutions tailored to their specific procurement requirements. These solutions can be developed internally or outsourced to specialized software development companies. Custom-built solutions offer flexibility and the ability to incorporate unique features based on the organization’s needs.

When selecting tools or software for managing purchase order numbers, consider factors such as scalability, ease of use, integration capabilities, and the specific requirements of your organization’s procurement processes.

Purchase Order Numbers (PO Numbers) Frequently Asked Questions

Q: Are purchase order numbers the same as invoice numbers?

A: No, purchase order numbers and invoice numbers are distinct. Purchase order numbers are generated by the Buyer whereas Invoice Numbers are generated by the Seller.

Q: Can a PO number be anything?

A: This depends on the policies of the buyer’s organisation. See above for more details but generally expect a properly formatted number from any small to medium-sized business upwards. I’ve been in early days start-ups where they have just used the manager’s name and date, so technically it could be anything.

Q: Who provides the Purchase Order number?

A: The Buyer will provide the Purchase Order Number

Q: How long is a purchase order number?

A: There is no minimum length but it is best to keep them 35 characters or less.

Q: Can a purchase order number have letters?

A: Yes, the buyer’s business may use a department or project prefix, for example, “IT42471066”

Q: What is Purchase Order status

A: This could mean a few things. Within the Buying company, it probably refers to where the order is within the procurement process for example, Draft, Awaiting Authorisation, Authorised, Sent to Supplier, Partially Received, Fully Received, Matched to Invoice, Complete, Cancelled, Void. If you are the supplier and the client is asking you for the status of their Purchase Order, they almost certainly just want to know when the goods or services will be supplied.

Q: Why is a Purchase Order number important?

A: In short, as a supplier you are unlikely to get paid if you can’t reference the customer’s Purchase Order Number on your Invoice. Without this, it is hard to prove there is a contract in place.

Q: What is a purchase requisition number?

A: In many businesses, this is just another name for a Purchase Order (PO). In some larger numbers, there may be an internal process to request a purchase. This then being performed by a dedicated Purchasing Department which would then issue a Purchase Order Number. This is more common in manufacturing where there are a lot of raw materials/ingredients being purchased.




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