Sales Terms You Need to Know: Comparing Purchase Order And Invoice
“Purchase order” and “invoice” are terms you’ll hear frequently in the word of sales. But there’s sometimes a little confusion over the exact functions they serve. If you’ve secretly been wondering what the difference is, which to use to ask people to pay you, and how to manage them, you’re in the right place!
Purchase orders and invoices are both official documents that help your business manage its finances. They set expectations on both sides of a transaction — but one is for making purchases, and the other is for requesting payments.
That’s the simple explanation! In this post, I’ll give you more detail on the functions, the differences, and the essential roles purchase orders and invoices play in your business.
Purchase order vs invoice
A purchase order (or PO) is sent by a buyer to a vendor, confirming the goods or services they wish to order. An invoice is an official request for payment for those goods or services, sent by the vendor to the buyer.
The aim of creating a PO is to guarantee the fulfillment of orders, and the aim of an invoice is to collect payment for products or services sold. Another key difference is the timescale — purchase orders are generated when the buyer places an order, while invoices are (usually) generated after the order has been fulfilled.
The benefits differ, too. Purchase orders are important for your inventory bookkeeping, making it easier to track goods and helping to reduce the risk of overstocking. Meanwhile, invoices prevent overpayments and duplications and help you stay on top of budgets and taxes.
Invoices also contain additional information such as applicable discounts, terms of payment, and the total amount due. Just remember: while the documents are completely different, it’s not a choice between one or the other — both are equally important.
Why do people confuse purchase orders and invoices?
It’s true that there are similarities between purchase orders and invoices. For example, both are forms of commerce communication regarding the purchase of goods and services. Each contains essential order details, vendor information, shipping information, and prices.
Invoices and purchase orders both play an important role in optimizing your company’s budgeting and spending, and they also give you clearer visibility into the buying process. Both documents are legally binding.
Now let’s get into the details of exactly what each one does.
What does a purchase order do?
A purchase order represents the initial stage of a business transaction. It’s generated and sent by the buyer’s accounting department, after a discussion between buyer and seller. The PO outlines the terms of the transaction, to which both parties have agreed. This includes details of the goods and services being purchased, prices, and delivery time.
Remember, it’s not just about ordering physical goods. For example, you’ve engaged a software company to carry out beta app testing on your behalf. You’ll send a PO detailing which services you require, when they need to complete them and how much you’re going to pay.
If the vendor is able to provide the goods or services as specified in the PO, they can approve the document — at which point it becomes a legally-binding contract, authorized by the management of both companies. Either party can consult this document to check details or answer any queries.
Purchase orders help finance teams keep track of purchases, enabling them to set budgets and spending limits. The ease of tracking products assists with the pick-up, pack, and ship process at the vendor’s end. POs also simplify invoicing for the seller, as we’ll see shortly.
We mustn’t confuse POs with purchase requisitions, which are part of the internal procurement process in larger companies. The firm places a requisition order with its own purchasing department, which then places a PO with the vendor who will supply the goods.
What should a purchase order include?
- PO number
- Date of purchase
- Order details (description of goods and services, quantity)
- Buyer information (including shipping address)
- Payment terms
- Vendor contact details
- Tax information
A PO number is a unique number that all purchase order documents contain. (Most accounting software will automatically generate this number for each new PO.) It means that both businesses can reference this number in any discussions they may have, and instantly access the correct document.
The number also enters the buyer’s system on receipt of the goods, automatically updating both your inventory and your accounts (assuming you have a smart online platform). Then, when an invoice arrives bearing the same number, the buyer can easily verify that they received the order as planned, and quickly authorize payment.
What does an invoice do?
An invoice is basically a bill that the seller issues on completion of the terms outlined in the purchase order — that is, the purchased products have been delivered or the service has been completed. The invoice confirms this and specifies the previously-agreed amount of money that the buyer owes.
Just like a PO, invoices apply to services as well as physical items. For example, if your company uses freelance workers or runs a marketing affiliate program, the freelancers or affiliates assume the role of the vendor and will send you invoices for the agreed services.
If you’re the buyer, invoices help you keep track of what you’re spending (and potentially figure out ways to reduce spending). For the seller, invoices provide an official reminder to the buyer to pay you as agreed. Once they’re marked as paid, everyone will have confirmation that the payment occurred. In both cases, invoices make things simpler when it comes to tax season!
Invoices are also a record of accounts receivable, which refers to the money you’re currently owed for goods or services. This is important for managing your balance sheet — and if you have investors, it tells them how quickly you’re receiving payments. Too many outstanding invoices indicate problems for buyers and sellers alike.
You may have heard the terms “purchase invoice” and “sales invoice”. A purchase invoice is created after the buyer has issued a PO and the order has been fulfilled. It contains a due date for payment. A sales invoice is a separate document presented to the buyer upon delivery, serving as a payment request.
What should an invoice include?
- Invoice date
- Invoice number
- PO number
- Vendor and buyer details
- Details of goods or services provided
- Agreed unit price
- Any credits or discounts
- Taxes (if applicable)
- Total amount due
- Payment schedule
- Accepted payment methods
- Seller’s ‘wet’ or electronic signature
As I mentioned earlier, you should always include the original purchase order number on the invoice for reference. That way, everyone can find both documents easily and ensure there are no discrepancies between them.
It’s important to include as much information as you can on the invoice so that the buyer doesn’t have to ask questions which could delay the payment process.
Managing purchase orders and invoices
Now you’re clear on the difference, here are a few extra tips for managing your invoices and POs.
Use the right technology
Small businesses might manage POs and invoices manually. But as the number of purchases or sales increases, this method becomes more time-consuming — and error-prone. You’re better off with a digital solution, such as wholesale management software or a cloud-based retail operations platform.
That way, you can automate the process, including creating documents, tracking status, and producing reports. Buyers can typically generate a PO via the seller’s system, or create their own and send it to the seller automatically. Sellers can create invoices from POs stored in their system.
Going digital means that you store all your documents in the cloud, instead of paper copies that could go missing and cause problems at audit time or in the event of a dispute. A lot of companies have started using invoice OCR API, which turns digital documents into editable files with searchable text. This technology is used by several sectors that process large amounts of data, including banking, accounts payable, and medical records. It’s a much simpler way to manage incomings and outgoings and check for problems, even if you haven’t had training on data analysis!
Set up recurring transactions
If you frequently purchase the same goods or services from a particular vendor, you can use a standing purchase order to avoid creating a separate PO each time. This allows you to submit multiple identical orders within a specific time frame.
Another option is to set up a blanket purchase order, which is usually used in B2B purchasing. This enables you to order multiple deliveries for a set price over a set period and may include discounts or other incentives for buying in bulk.
Promote your brand
Like any material produced by your company, invoices and purchase orders provide another opportunity to reinforce your brand identity. Including elements like your logo, branded headers and footers, and your preferred typeface will increase recognition, and help your documents stand out from a stack of plain ones. Accounting software often allows you to personalize the appearance of your documents.
To recap: purchase orders and invoices are completely different financial documents, and it’s important that salespeople know how each one works. The similarity is that both aim to avoid misunderstandings between vendors and buyers, as both parties can easily see what’s been ordered when it’s required, and how much it costs.
Instead of managing POs and invoices manually, you can save time and reduce errors with a digital solution—perhaps as part of a wider platform for retail operations. This will help you handle increased demand and new e-commerce trends.
About the author:
Xiaoyun TU – Brightpearl. Xiao is the Global Head of Lead Generation at Brightpearl, a leading retail operations platform. She is passionate about setting up innovative strategies to grow sales pipelines and warehouse operations using data-driven decisions. Xiaoyun has also written content for Prisync and Jumpseller.
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