Those unfamiliar with the procurement process may find it difficult to distinguish between purchase orders (POs) and invoices. Even seasoned purchasing teams could misuse the two terms.
Failure to familiarize yourself with procurement terms may cause you to overlook critical financial documents, missing important details that could have a negative impact on your company’s expenses.
Therefore, understanding the differences between purchase orders vs invoices is essential. This guide will provide comprehensive explanations of the two procurement terms, what each one entails, and how they really differ from one another.
Purchase Order vs Invoice
Although a purchase order and an invoice contain much of the same information, they provide two distinct purposes.
At the beginning of a business transaction, the buyer issues a purchase order. This document records the client’s expectations for the products or services needed, as well as the quantity and pricing. Then, the purchase order is sent to the supplier for approval. The purchase order is a legally binding contract after it has been approved.
When the purchase order terms are met, the seller issues an invoice. An invoice contains the previously agreed-upon amount, which the buyer must now pay once the order is fulfilled. It can also specify payment choices for the seller, like checks and electronic payments, among others.
For reference, an invoice contains the original purchase order number. This will demonstrate to the buyer’s finance team that this transaction had previously been budgeted for and approved. This could help the vendor or supplier get paid faster.
What Is a Purchase Order?
A purchase order is a legally binding document that defines the products or services your company wishes to procure from a supplier. The purchase order also outlines the agreed-upon payment terms, including price, delivery date, and quantities.
The creation of a purchase order initiates the procurement process and typically serves as a binding agreement between your company and the supplier. Once the supplier has fulfilled the order, they will send an invoice for the products or services delivered to your company.
What Should Be Included in a Purchase Order?
A purchase order should include the following information:
- Your company’s name and contact information
- The supplier’s name and contact information
- A description of the goods or services being requested
- The quantity of the goods or services being requested
- The delivery date of the goods or services
- Any special instructions, such as shipping instructions or specifications
- Tax Information
Why Is a Purchase Order Important?
There are a variety of reasons why you might wish to use purchase orders for order placement, whether you run a small or large organization. You can do the following things with a purchase order:
Place an order for goods or services
A purchase order is most commonly used to place an order for goods or services. When you create a purchase order, you specify the items you need and the quantities of each item. You may also include specific instructions for the supplier, such as delivery date or payment terms.
Get approval for the order
A purchase order is not a binding contract, but it does serve as an official request for goods or services. The supplier cannot begin fulfilling the order until they have received written confirmation from your organization, typically in the form of a purchase order acceptance.
Track the order
A purchase order can help you track the status of your order, from the time it is placed until it is delivered. This information can be helpful in compiling reports and analyzing spending trends.
Effectively manage your inventory
Companies frequently lack clear inventory visibility, which leads to issues such as inventory stockouts. A purchase order system will assist you in determining how much stock to maintain and when to replenish it, allowing you to optimize your operation and improve your inventory management.
Improve company budget
You’ll need to determine order quantities and costs before the project is initiated in order to issue accurate POs for a large project. This should help you budget for such initiatives more effectively.
Serve as a reminder of what was ordered
If there are any changes to the original order, a purchase order can serve as a reminder of what was originally requested. This can help avoid any confusion or miscommunication between your organization and the supplier. For example, you risk generating duplicate requests and losing money if you don’t have a purchase order in place.
Serve as evidence of an agreement between your organization and the supplier
As a legally binding document, if there is a dispute between your organization and the supplier, a purchase order can be used as evidence of the agreement between both parties.
What Is a Purchase Order Number?
A purchase order number (PON) is a unique identifier assigned to a purchase order document. The PON is typically composed of numbers and letters and is used to track the progress of the order from creation to delivery.
The purchase order number should be referenced in any communication between suppliers and buyers regarding the order. Doing so will help to ensure that all parties are on the same page and avoid any confusion.
A PON is also important for reconciling orders with invoices. The invoice number should match the purchase order number to confirm that the items listed on the invoice were actually ordered and received by the company.
What Is an Invoice?
An invoice is a document that specifies the products or services purchased by a customer and the corresponding cost. The invoice is sent to the buyer after the purchase has been made.
The invoice should include:
- A brief description of the items or services purchased
- The quantity of each item purchased
- The unit cost of each item
- The total amount of the purchase
- The date of the purchase
- The name and contact information of the seller
What Is a Purchase Invoice?
A purchase invoice is an invoice used to record the purchase of goods or services by a company. The purchase invoice will include the same information as a regular invoice, but it will also list the terms of the purchase agreement and any discounts that were negotiated.
The purpose of a purchase invoice is to serve as a record of the goods received as well as document the terms of the purchase agreement.
What Is a Sales Invoice?
Sales invoices are practically similar to purchase invoices. However, the seller sends a sales invoice to the buyer after the products and services have been delivered.
A sales invoice’s aim is to detail the items and services delivered, the quantity of each, and conditions of sale, including delivery method and payment due date.
What Is the Significance of an Invoice?
At its most basic level, an invoice is an official document that records the completion of a business transaction and allows an organization to get paid for goods or services provided. Invoices can do a lot more than that though, for example, they let you do things like:
Make tax season less complicated
Who doesn’t wish for a less stressful tax season?
Keeping track of your invoices protects you and your business, and it makes auditing and settling your accounts easier later.
Organize your company’s financial records
One of the primary functions of the invoice is to provide documentation between the buyers and the sellers. Sending, receiving, and paying bills demonstrates that both parties are in touch, and the itemized format of an invoice keeps your business operations visible.
Help your company stay on track
Invoices are a crucial tool for keeping everyone on the same page regarding payment. If you or your customer is on a payment plan, each invoice lists the itemized goods or services for the most recent deliveries and keeps a record of account balances.
Complete payment and processing faster
You might be compelled to include only the bare minimum on your invoices to save time, but it would be best to avoid that as much as possible. The more details you provide, the fewer queries your customers will have, which helps speed up the payment process.
Aids in managing your company’s accounts receivable
Invoices are also necessary because they serve as a record of your accounts receivable, which are all of the payments due for goods or services that have been delivered but have yet to be paid.
It also assists outside investors in understanding how soon your company receives payments from outstanding invoices. Investors can determine how effective your company is at collecting payments by looking at the accounts receivable turnover ratio.
Purchase Order vs Invoice: What’s the Difference?
So, how can you distinguish between a purchase order and an invoice? They appear to be very similar at first; however, they are not.
To improve the purchase order and invoice processes, you must first understand their distinctions.
Differences Between Purchase Order and Invoice
A purchase order is an official document that forms an agreement between the customer and the vendor regarding the goods that the former wants to buy. It also includes the expected delivery date and any special requirements or conditions.
On the other hand, an invoice is a record for goods or services provided. Each item or service is listed on the invoice along with its price and the total amount due.
There are several critical differences between purchase orders and invoices:
The primary purpose of a purchase order is to authorize a purchase and establish the terms of the agreement between the buyer and seller. In addition, it is a legally binding document once accepted by the seller.
On the other hand, an invoice is a bill for goods or services rendered and is used to request payment for those goods or services.
As previously mentioned, a purchase order typically contains information such as the buyer’s contact information, the item or service being purchased, the quantity of items being purchased, the price of each item, the shipping date, and any special requirements or conditions.
An invoice lists the items or services that were provided, the price of each item or service, and the total amount due.
A purchase order is typically a printed document signed by both the buyer and the seller. In contrast, an invoice can also be a printed document but is more often than not, an electronic document sent to the buyer via email or purchase order software.
A purchase order is created before the goods or services are delivered. On the other hand, an invoice is created after the goods or services have been rendered.
A purchase order is typically signed by both the buyer and the seller, while an invoice is typically signed by the seller only.
A purchase order does not guarantee payment, while an invoice guarantees payment for the goods or services listed on it.
A purchase order does not include taxes, while an invoice includes the applicable taxes.
Similarities Between Purchase Order and Invoice
Purchase orders and invoices are among the most perplexing financial terms. Both are communications regarding goods and services that are tied to commerce. However, the timing of their occurrences differs.
The terms purchase order and invoice are sometimes used interchangeably. Despite their differences, purchase orders and invoices have a number of similar characteristics:
- Purchase orders and invoices are purchase-related commercial communications.
- Both are crucial to getting the most out of your budget.
- Both documents provide you with a clearer picture of the buying process.
- Basic order information, delivery information, vendor information, and a price are included in both.
Why Do Companies Need Purchase Orders and Invoices?
Although a purchase order or invoice may appear to be an additional burden, these financial papers assist a business in efficiently managing its purchases as the demand for purchases grows and the buyer-seller relationship evolves.
Both purchase orders and invoices are essential documents for businesses because they help to ensure that both buyers and suppliers are aware of what was ordered, when it was ordered, and how much it cost. This can help to avoid any confusion or misunderstandings about what was purchased and from whom. Additionally, having accurate records of purchases can be helpful for tax purposes.
There is no right or wrong answer when choosing between a purchase order and an invoice, as both documents are equally significant. While purchase orders appear necessary from a legal standpoint, invoices also provide much-needed clarity and can help avoid problems down the road.
Using purchase orders and invoices will avoid communication errors by setting explicit expectations of the things being purchased, regardless of whether demand is increasing or decreasing, or whether the purchasing process is simple or challenging.
Managing Your Company’s Purchase Orders and Invoices
Manually managing purchase orders and invoices is simple initially when a business is still small, and the quantity of purchases is moderate. However, as the business grows, so do the purchases.
Knowing the distinctions and similarities between purchase orders and invoices won’t assist you much here. Even if you use an invoice template, manually creating a large number of such documents can be time-consuming and error-prone.
Furthermore, manual records have the tendency to become disorganized — or even worse, disappear — causing issues during disputes or audits.
Fortunately, you may eliminate cumbersome, paper-based operations with digital purchase orders and invoicing. You won’t have to make a photocopy of the documents, which might add up quickly if you’re sending out a lot of POs and invoices every day. Overall, it’s more cost-effective, secure, and convenient to use a digital solution.
Invoices and purchase orders are critical components of the purchasing process for every business. Anyone involved in acquiring goods or services on behalf of a company should be aware of the differences between the two.
By understanding the purpose and use of each document, you can ensure that your business gets the most out of its purchasing process and avoids unnecessary headaches both during and after purchasing.