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Why purchase orders matter for budget control

By the EMPOBase team · · 4 min read

Short answer

A purchase order is a written commitment to buy from a named supplier at an agreed price. It matters for budget control because it records a promise to spend before the invoice arrives. If you count only paid invoices, a budget line looks healthier than it is. Counting open orders shows the true amount still available.

Key points

  • A purchase order records a promise to spend, so the budget shows committed money, not only paid money.
  • Available balance is budget minus actuals minus open commitments.
  • Issue the order before the supplier delivers, never after.
  • Close or cancel old orders so commitments stay accurate.

What is a purchase order?

A purchase order, or PO, is a document your organization sends to a supplier. It lists what you want to buy, the price, and when and where to deliver. Once the supplier accepts it, it is a commitment for both sides.

A PO follows an approved purchase requisition and the supplier selection. It is the point where an internal wish becomes a promise.

How does a PO help control the budget?

Think of a grant line with 20,000 in the budget. You have paid invoices of 8,000. The line looks half-empty. But three open orders add up to 9,000, and the goods have not arrived yet. The real balance is 3,000, not 12,000.

Available = Budget − Actual − Commitment.

Without POs, the 9,000 is invisible until invoices arrive. By then you may have promised more than you have. With POs recorded, a manager sees the true balance before approving the next request. Our article on budget vs actual reviews explains how commitments fit the monthly check.

What should a PO contain?

  1. PO number. A unique number, never reused.
  2. Date and supplier. Full name and contact.
  3. Items. Description, quantity, unit and unit price, matching the quotation.
  4. Totals. Tax and delivery shown separately.
  5. Delivery. Place, date and who receives.
  6. Terms. Payment terms and any warranty or quality requirements.
  7. Charge to. The project and budget line.
  8. Approval. Who approved it and at what level.

A PO that is vague invites disputes. If the supplier delivers something different, a precise PO is what you point to.

When should you issue the PO?

Before delivery. Always. An order raised after the goods arrive, sometimes called a “retrospective” or “after the fact” order, defeats the purpose. The budget never saw the commitment, and the approval happened too late to say no.

Some situations, such as an urgent field need, force a fast purchase. Treat them as exceptions with a written reason and a higher approver, and issue the PO as soon as possible. Our article on emergency procurement covers this in more detail.

How do you keep commitments accurate?

An open PO that will never be delivered still blocks budget. Review open orders on a schedule:

  • Partly delivered. Reduce the open amount to what remains.
  • Cancelled. Record it and release the commitment.
  • Price changed. Amend the PO, with approval if the value crosses a band.
  • Old and untouched. Ask the buyer to confirm or close it.

A monthly review of open POs takes little time and keeps the budget view honest.

What happens after the PO?

The PO is the first of three records you will compare later: the order, the goods received note, and the supplier invoice. Our article on the three-way match shows how to check them against each other before payment.

A short example. A project has a training line of 15,000. Actual spending to date is 4,000. The venue order is 5,000 and the catering order is 3,000, both open. A manager who looks only at actuals sees 11,000 left and approves a new 6,000 request. A manager who counts orders sees 3,000 left and says no, or asks for a revision. The only difference is that the commitments were recorded when the orders were issued.

What about orders in another currency? Record the order in the supplier’s currency and the project’s currency, with the exchange rate and date you used. When the invoice arrives at a different rate, note the difference. This keeps rate movements from looking like overspending.

What should you do when an order exceeds the requisition? Treat any increase as a new approval. A small tolerance is fine if your policy says so. Anything above it goes back to the approver with the reason, before the supplier is told to proceed.

Who may issue purchase orders? Limit this to named buyers, and keep the buyer separate from the approver and from the person who receives the goods. When one person can request, order and receive, the PO stops being a control. Publish the list of buyers, review it when staff change, and remove access quickly when someone leaves or moves. A short list that is kept current is easy to defend in an audit and hard to abuse.

Where EMPOBase fits

In EMPOBase, when an approver issues a purchase order to an eligible vendor, it creates a live commitment visible against the project budget. If the order is cancelled, the commitment is released. Restricted Funds also show what is spent, committed and still available per award. EMPOBase records the order and the budget effect; it does not send money, and it has no settlement or proof-of-payment record. See the procure-to-pay workflow for the steps around the order.

Questions people ask

What should a purchase order include?

The order number, date, supplier, items with quantities and unit prices, tax, delivery address and date, payment terms, and the project and budget line. Refer to the agreed quotation.

What is the difference between committed and actual spending?

Committed spending is money promised through an open order. Actual spending is money recorded when an invoice or payment is posted. Commitments come first and become actuals later.

Can a purchase order be cancelled?

Yes, but check the supplier terms first. Record the cancellation and the reason, and release the committed amount so the budget shows the real balance.