Skip to content
Small Business UK

Small Business UK

Advice and Ideas for UK Small Businesses and SMEs

  • Subscribe
  • facebook
  • twitter
  • linkedin
  • RSS
  • Starting
    • Start a New Business
      • Setting up your business
      • Getting your business going
    • Advice
    • Funding
    • Ideas & planning
    • Investing in a franchise
    • Setting up a company
    • Sole trader
    • Success stories
    • Work life balance
  • Financing
    • Accounts & Tax
    • Alternative finance
      • Crowdfunding for Business
    • Banking
    • Business Loans
    • Grants
    • Payroll
  • Running
    • Business management
    • Buying and selling a company
    • Employing & managing staff
    • Export & Import
    • Finding and selling to customers
    • Insurance
    • Masterclass Series
    • International Business
    • Legal advice
    • Marketing
    • Office & home working
    • Getting Online
    • Technology
    • Taking Payments
    • Productivity
    • Smart Energy GB
  • News
    • Law
    • Management
    • Opportunities
    • Outlook
    • Partner Content
  • Podcast
  • Guides
    • Guides
    • Series
  • Business Tools
    • Start-Up Series
      • About
      • How to enter
      • Partners
    • Funding Your Small Business
    • Making Tax Digital
    • Website Checker
  • Starting
    • Start a New Business
      • Setting up your business
      • Getting your business going
    • Advice
    • Funding
    • Ideas & planning
    • Investing in a franchise
    • Setting up a company
    • Sole trader
    • Success stories
    • Work life balance
  • Financing
    • Accounts & Tax
    • Alternative finance
      • Crowdfunding for Business
    • Banking
    • Business Loans
    • Grants
    • Payroll
  • Running
    • Business management
    • Buying and selling a company
    • Employing & managing staff
    • Export & Import
    • Finding and selling to customers
    • Insurance
    • Masterclass Series
    • International Business
    • Legal advice
    • Marketing
    • Office & home working
    • Getting Online
    • Technology
    • Taking Payments
    • Productivity
    • Smart Energy GB
  • News
    • Law
    • Management
    • Opportunities
    • Outlook
    • Partner Content
  • Podcast
  • Guides
    • Guides
    • Series
  • Business Tools
    • Start-Up Series
      • About
      • How to enter
      • Partners
    • Funding Your Small Business
    • Making Tax Digital
    • Website Checker
  • Subscribe
Home » Running a Business » Legal advice » Are purchase orders legally binding?

Are purchase orders legally binding?

What needs to be on a purchase order?‏

by Paul Barnes28 June 2021

Are purchase orders legally binding? What are the benefits of a purchase order and how does the process work? Paul Barnes explains more

Understanding the legal implications of purchase orders is important. After all, if faced with a client refusing to pay an invoice, or you receive an invoice for twice the amount stated on a purchase order (PO), you need to understand your position.

So, is a PO legally binding? And above and beyond the legal ramifications, are there other advantages to raising POs? Here, Paul Barnes, MD of MAP, an outsourced finance function for digital creative agencies, provides his purchase order insights.

Purchase orders are a legal contract

If you issue or receive a PO, it’s a legally binding document once accepted. In essence, it’s a contract between the buyer and the seller. As a supplier, if you raise a PO and send it to your customer, this is notifying them of their legal obligations to pay you the agreed amount. As a customer, you need to be aware that when you receive a PO, this is obliging you to pay the amount on the purchase order. If the amount is incorrect, this must be disputed immediately and a new PO issued. Failure to dispute a PO at the time of issuing will place you in a weak legal position.

POs are therefore extremely helpful in the payment collection process as it ensures a smooth transaction. After all, the customer will be unable to claim that they did not approve the service or goods if the supplier has evidence that a purchase order was received.

What needs to be on a purchase order?

Drafting a PO is straightforward. You just need to ensure that all the key information is included. This must include the date you’ve issued the PO; goods/services the customer wants to buy from you; the type and quantity of items ordered; the agreed price; payment terms; delivery costs and details; and any other terms and conditions. It’s also advisable to include a PO number which can be quoted on the invoice and in any correspondence with the supplier.

>See also: Purchase orders explained for a small business

Benefits of POs

POs are a very important from a legal perspective, however they also have a number of other benefits which shouldn’t be underestimated. These include:

Spend control – From the buyer’s perspective, POs provide an important spend control so that any purchases aren’t made outside of budget.

Easier reconciliation – The buying party can be assured that purchase invoices received reconcile with the ‘agreements’ stipulated in the purchase orders. Without this level of control, errors and disputes are more likely. And when the supplier can ‘match’ a purchase order and invoice together, this may well speed up payment processing.

Outgoings can be forecast early on – POs enable the buyer to forecast their outgoings at the earliest possible stage – when the purchase order is first created and approved – rather than waiting for the purchase invoice to be received into the accounting system.

Improved financial reporting – As you will be less reliant on the supplier to provide an invoice in order for the cost to ‘make it into month end’, you can improve your financial reporting. By accruing for outgoings based on purchase orders, you have a far more accurate picture of your financial position.

The purchase order process

So what happens when a purchase order is raised and leaves your outbox? Here are the main steps of purchase order processing:

  1. A PO is raised after agreeing a price and sent to the purchasing company
  2. The purchaser receives the PO and approves it (it then becomes legally binding)
  3. The goods/services are provided by the supplier
  4. The supplier raises an invoice with reference to the PO number
  5. The invoice and PO are matched
  6. The invoice is approved and processed
  7. The invoice gets paid
  8. The PO is closed

Improve your chances of getting paid

Although purchase orders are key to getting paid, they are just one side of the payment collection process. Getting paid on time also depends on the invoice and your cash collection process. To improve your chances of getting paid without issue, it’s wise to do the following:

  • Ensure everything the customer requires is on the invoice. Include the PO number as standard as well as a description of your product/service and if necessary, who authorised the purchase. Ask your customer whether anything in particular needs to be on the invoice so that the processing isn’t stalled.
  • Email the customer a week or two before the invoice is due saying “Any issues with this invoice getting paid on time?” This then provides the ideal opportunity for them to dispute it before it’s due.
  • Have a consistent invoice chasing process in place so that you prevent any invoices from getting severely overdue. An automated invoice chasing solution is a great investment as some customers will repeatedly pay late (and only pay after repeated badgering!)
  • State you will add a fixed fee and interest on the invoice (The Late Payment of Commercial Debts (Interest) Act 1998)if it is not paid within a certain time frame. This statutory legislation will take precedence and can be enforced so long as you don’t have any late payment terms in your contract.

>See also: How to deal with late payment

Be purchase order savvy

Purchase orders are vital documents for enabling smooth transactions. As they’re legally binding once agreed, both the supplier and buyer must stand by this contract. POs are also really useful documents in other ways, ensuring spend stays within budget and helping with early forecasting and reporting. As a small business it’s important to get into the habit of raising and requesting POs as without them, payment disputes and cash flow issues are far more likely.

Paul Barnes is the managing director of MAP.

Read more

Purchase Order Best Practices and Processes

Tagged: Small Business Legal Issues

Related Topics

Small Business Legal Issues

Leave a comment

You must be logged in to post a comment.

Related Stories

Legal advice

What is the UKCA mark and how does it affect my small business?

We explain the new UKCA mark which has replaced the CE mark for products sold on the market in Great Britain

Legal advice

Plastic Packaging Tax – what does it mean for my small business?

From April 2022, businesses will be liable to pay Plastic Packaging Tax. We explore what it is and whether it will affect you

Legal advice

How to obtain a UK patent – a 10-point checklist

Obtaining a patent can be time-consuming and expensive. But a patent can prevent others from using your invention, generate licensing income, encourage investment and even lower your tax bill

Legal advice

Can my employer stop me from setting up a competing business?

What you can and can’t do when setting up in competition against your former employment is often in the fine print of your contract, warns Harper James Solicitors

Helping you grow your business is our number one priority, if you would like to take your business to the next step just sign up!

sign up now

Related Stories

Legal advice

What is the UKCA mark and how does it affect my small business?

We explain the new UKCA mark which has replaced the CE mark for products sold on the market in Great Britain

Legal advice

Plastic Packaging Tax – what does it mean for my small business?

From April 2022, businesses will be liable to pay Plastic Packaging Tax. We explore what it is and whether it will affect you

Legal advice

How to obtain a UK patent – a 10-point checklist

Obtaining a patent can be time-consuming and expensive. But a patent can prevent others from using your invention, generate licensing income, encourage investment and even lower your tax bill

Legal advice

GDPR three years on: make sure your small business is compliant

Many small businesses think if they just ignore the EU’s GDPR regulations, they will just go away. Lawyer Chris Cook warns SMEs they face crippling fines if they do nothing

SmallBusiness.co.uk provides advice and useful guides to UK sole traders and small businesses. Our goal is to help owner managers and entrepreneurs to start, run, grow and succeed in business, helping turn your business idea into a profitable business.

The Bonhill Network

  • Bonhill Group plc
  • Information Age
  • InvestmentNews
  • What Investment
  • Growth Business
  • Tax Guide
  • DiversityQ

Further Information

  • Contact Details
  • Privacy Policy
  • Cookie Policy
  • Terms & Conditions
  • Blog
  • About this Website
  • Media Packs
  • Contributor guidelines
  • Small Business Whitepapers

Contact us

  • 0207 7638 6378

Address

  • Bonhill Group plc
  • 29 Clerkenwell Road
  • London
  • EC1M 5RN

A part of the Bonhill Group