What is a PO Number and Why Does it Matter in Business?

What is a purchase order?

Purchase order (PO) numbers exist not out of corporate desire to make things more complicated but rather to organize and categorize the more complex aspects of tracking transactions.

Modern transactions demand greater attention from businesses. A purchase order system maintains organized financial records, tracks product inventory, manages supplier relationships, and fosters transparency throughout the entire procurement process.

What is a purchase order number?

At its simplest, a purchase order number is an identifier businesses use when making a purchase. Both the buyer and seller use these numbers to track orders, ensure accurate billing, and manage financial records.

PO numbers keep operations moving flawlessly. These numbers prevent duplicate payments and purchases, which create ballooning costs that are more difficult to offset.

They also improve supplier relationships by aiding in inventory management. A better handle on your inventory removes the added stress of inconsistent orders with suppliers, allowing both you and your partners to plan more effectively.

Components of PO numbers.

Purchase order forms ensure accountability and transparency within the entire purchase order process. When you look at one, you’ll notice a few key components that identify a specific transaction, including:

• Unique identifier: A code, such as a string of sequential numbers or a combination of letters and numbers, that identifies a specific order. This identifier ensures that there are no duplicate orders.
• Department or project code: Another identifying code that denotes which department or project each order belongs to. These numbers are instrumental in large organizations where multiple departments handle procurement.
• Date of issue: This component is rather self-explanatory. Dates identify order creation, timelines for delivery, and expected pay-by timeframes.
• Supplier codes: Organizations partnering with multiple suppliers will use a supplier code. These numbers distinguish different suppliers within your system to identify where goods and services come from.

How PO numbers work.

Now that you know what a purchase order is, let’s dive into how they’re actually used. That is, what is the PO number lifecycle like? What are the steps a PO number goes through before you close out the workflow?

Here’s an example:

1. When an organization places an order with a supplier, the process of creating a PO number begins. While generating PO numbers manually is possible, many businesses now create them using automated AP and procurement solutions.
2. The PO number accompanies the purchase order form, which goes to the vendor. It may be a separate printed document, an attached electronic record, or part of an online transaction process.
3. As the order progresses through the fulfillment process, its unique PO number follows along. Workers utilize PO numbers to assist with logistics when shipping products to end buyers. Buyers then use PO numbers when receiving goods and services to verify delivery and quality. This process is supported by two- and three-way matching, where buyers cross-check POs, invoices, and receipts to ensure that the details align, preventing overpayments and ensuring accurate transactions.
4. Businesses on the buying side integrate PO numbers within their financial management systems to track expenses, manage budgets, and generate audit trails for accurate accounting. Automation saves time during the PO approval process, making it a valuable upgrade over manual processes.

Why PO numbers matter in business.

Implementing PO numbers into your financial workflows comes with numerous benefits, such as:

• Streamlined financial management: PO numbers serve as a unique identifier for each purchase, leading to a reduced risk of overpayments and duplicate transactions. Integrated PO numbers also create paper trails that are vital for audits.
• Improved procurement efficiency: A well-managed PO number system reduces manual errors, which minimizes delays and supports the negotiation of better payment terms with suppliers​. Requiring PO numbers before placing orders prevents unauthorized purchases, which is essential for controlling costs and staying under budget.
• Strong supplier relationships: Purchase order documents are communication tools between buyers and suppliers. They ensure both parties are clear about the terms of each transaction, preventing misunderstandings and disputes.
• Robust compliance and accountability: PO numbers ensure compliance with procurement policies and accountability within the purchase process. The paper trail created by PO numbers documents all authorized purchases, which is vital for internal controls and external audit requirements.

While smaller organizations may use a simple invoice number, sales invoice, or non-PO invoice to manage transactions, larger businesses need the extra layer of accountability and transparency to prevent issues.

How to create and use a PO number.

Creating and using PO numbers is easier than ever, thanks to advanced accounting software tools like Airbase.

These automatic tools reduce errors and speed up the purchase order process. But knowing how the process works opens the possibility of customization or manual validation. Here’s how systems use PO numbers:

• Track orders: A PO serves as a guide throughout the procurement process. Businesses use them to track order details from purchase through to delivery.
• Integrate with invoice and payment systems: PO numbers link invoices and payments, which is vital for maintaining financial clarity. By integrating PO numbers with your payment systems, you can match codes with received goods or services and invoices to manage cash flow and budget constraints.
• Manage supplier relationships: A PO number acts as a form of communication with suppliers. Because POs are legally binding, PO numbers prevent disputes and damage to relationships.

Most of these actions take place behind the scenes. Digital tools perform the legwork, allowing accounting professionals to focus on other priority tasks.

Best practices for using PO numbers.

PO numbers can significantly impact a business’s bottom line by reducing procurement-related errors, preventing unauthorized spending, and ensuring streamlined invoice reconciliation. But to get the most out of PO numbers, you must implement a few best practices, such as:

• Consistent use across departments: Standardize the use of PO numbers for purchases across your organization. This consistency helps you maintain a clear audit trail that reduces the risk of unauthorized spending.
• Regular audits and reviews: Periodic internal audits of your PO process help identify inconsistencies and gaps within the system. This practice ensures financial record integrity and prevents legal intervention.
• Training and communication: Provide continuous guidance and training to staff on the proper use of PO numbers and the PO process. Training and feedback keep everyone on the same page while communicating the importance of PO numbers to stakeholders, which fosters a company-wide culture of financial discipline.

Improper use of PO numbers or failure to consistently use PO numbers can come with adverse effects, such as overspending, inaccurate records, and bottom-line destroying errors.

Streamline your PO number management with Airbase.

Purchase order numbers are the backbone of efficient procurement processes, providing a clear trail for every business transaction. From creating a legally binding agreement between the buyer and the seller, to enabling accurate record-keeping and streamlined financial management, the benefits of using PO numbers are clear.

Airbase simplifies the use of purchase orders by automating the entire process and integrating it seamlessly into the procure-to-pay workflow.

With Airbase, organizations can easily create, track, and manage POs from a central platform. It all happens with the same intuitive workflows as all spend requests. Purchasers simply initiate POs, which are then automatically routed for approval based on pre-set policies, ensuring compliance and reducing manual errors.

Once goods or services are received, Airbase’s PO matching functionality verifies that the order, receipt, and invoice align, helping to prevent discrepancies and overpayments. This streamlined approach not only enhances control over purchasing but also ensures transparency, visibility, and accurate financial reporting, all while saving time and reducing administrative overhead.

If you’re ready to get more out of your procurement process and harness the power of PO numbers, explore Airbase’s comprehensive spend management platform. Airbase helps you automate every part of the procure-to-pay process for total control over your financial operations.

Take the first step towards more efficient, transparent, and controlled business spending by requesting a demo today.