How to set up a purchase order system for your company

Why most small companies need a PO system before they think they do

Most businesses start without a formal purchase order process. The director buys what's needed, invoices arrive, they're paid. This works until the company has more than a handful of people placing orders, at which point invoices start arriving for things nobody remembers authorising, spend totals are a surprise at month-end, and reconciling what was ordered against what was received against what was charged becomes time-consuming.

A purchase order is simply a formal document sent to a supplier before goods or services are provided, stating exactly what is being ordered and at what price. It creates a binding commitment on both sides and a reference number that ties together the order, the delivery and the invoice. Setting up even a basic system early — before spend volumes make it painful — saves the cost and confusion that comes from retrofitting one later.

Design your approval rules first

The most important decision in setting up a PO system is who can authorise spend, and up to what limit. Start by defining a simple approval matrix:

1. Small purchases (below a defined threshold, e.g. £500) — any named staff member can place without prior approval.
2. Mid-range purchases (e.g. £500–£5,000) — line manager or department head approval required before a PO is raised.
3. Large purchases (above threshold) — director approval required, ideally in writing.

The exact thresholds depend on your business size and culture. The important thing is that they are written down, communicated to everyone who buys on behalf of the company, and actually enforced. Approval rules that exist only on paper provide no control. Embed them in your process from day one rather than trying to change behaviour later.

Set up the system itself

For most small limited companies, you have three practical options:

• Your accounting software — Xero, QuickBooks and Sage all include purchase order modules. Raising a PO in the same system where invoices are processed makes matching simple and keeps the audit trail in one place.
• A dedicated procurement tool — products like Procurify or ApprovalMax add approval workflows on top of your accounting system, useful once you have a team placing orders regularly.
• A controlled spreadsheet or form — adequate for low-volume purchasing if the other options are more than you need, but it requires manual discipline to work reliably.

Whichever system you choose, every PO should include: a sequential reference number, the date, the supplier name, a description of goods or services ordered, quantity and agreed unit price, expected delivery date, and the name of the authorising manager. These fields are not optional — they are the information that makes the later matching process work.

The three-way match: how invoices are processed

The core discipline of a PO system is the three-way match: when a supplier invoice arrives, your accounts team confirms that it matches:

1. The purchase order — the right supplier, the right items, the agreed price.
2. The goods received note (GRN) or proof of delivery — the items were actually received in the quantity ordered.
3. The invoice itself — the amounts are correct, the PO number is quoted, and nothing has been added.

If all three agree, the invoice is approved for payment. If they don't — if the quantity is wrong, the price differs from the PO, or no GRN exists — the invoice is queried with the supplier before it is paid. This single habit eliminates most invoice fraud, overbilling and errors. It also gives you a clean basis for reconciling supplier statements and resolving disputes.

Common problems and how to avoid them

PO systems fail in predictable ways. Watch for and actively prevent these:

• Bypassing the system for speed — people order without a PO because they're in a hurry, then raise the PO retrospectively, which makes it meaningless. Enforce the rule that a PO must exist before the order is placed, without exception for urgent purchases (expedite the approval instead).
• Supplier invoices that don't quote the PO number — require it from every supplier as a condition of working with you. An invoice without a PO number goes to query, not to payment.
• PO numbers issued but never closed — regularly review open POs and close or cancel any that won't result in an invoice. Open POs that no longer represent real commitments inflate your apparent outstanding liabilities.
• No link to budget — a PO that is correctly authorised can still blow the budget if no one checks whether the spend is within the approved departmental limit. Link each PO to a cost centre or budget code from the start.