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Not many know the difference between an invoice and a purchase order(OP). However, these are two essential financial terms you need to have a distinct idea of – Especially when you are starting your new business.

If you run a business that deals with a lot of physical inventory, you are more likely to deal with purchase orders and invoices daily. 

So what is a purchase order? What is an invoice? Let’s find out.

What is a Purchase Order?

A purchase order is a document sent by the buyer to the seller. It is to confirm the order officially. Usually, a purchase order includes the following details.

  • Date of order
  • PO number
  • Details of products ordered
  • Name and address of the buyer
  • Name and address of the seller
  • Terms and conditions
  • Signature of issuing authority

When you are a frequent customer who orders the same product more often, you can use a ‘Standard Purchase Order’. This enables the buyer to purchase the same product on multiple occasions over a period of time with ease. This is because a standard purchase order allows you to purchase the product over and over again using the same PO number.

Since now you have a clear idea of what is a purchase order, let’s have a look at why companies use purchase orders.

Why companies use purchase orders?

To set clear expectations for vendors

PO clearly states the requirement of the buyer. Thus both parties can rely on the purchase order to make sure the order has delivered as per the set expectations.

Help manage orders

The document enables easy order tracking, helping all the departments involved in the supply chain process such as procurement, inventory, finances, and shipping, …etc.

Track orders effectively

PO enables the vendor to keep track of the order effectively, monitoring its status regularly. So he can ensure on-time delivery to the buyer without any delay.

For audit trails

PO provides useful audit trails. With these risks for internal frauds can be reduced drastically. PO makes sure employees can't purchase amounts higher than required as you always have a PO to refer back to if there is anything fishy.

Help with inventory management

It improves the inventory management process providing accurate information on how much inventory has sold to each client. It will help make the reordering process effective without over-ordering.

What is an Invoice?

Invoice is a document sent by a vendor to the buyer — the primary purpose of raising an invoice is to request payment for the purchase. The report summarizes the goods or the services the buyer agreed to purchase. Usually, this type of document is sent after the vendor received the purchase order and had been agreed upon. 

Invoices are sent once the payment for the purchase is made. Or when the goods or the service is delivered notifying the client of the customer the payment due date( if you are dealing with small businesses and freelancers). 

A stranded invoice includes the following details.

  • The date the invoice is issued
  • Name and address of the seller
  • Name and address of the buyer
  • Invoice number
  • Purchase order number, if a PO was issued
  • Details and quantity of the goods and services provided
  • Agreed-upon prices
  • Any discounts or taxes
  • The total amount that is due
  • Payment due date
  • Transaction terms and conditions (optional)

Invoices are essential financial documents every business should handle effectively. There are mandatory for receiving and accepting payments. Also, to keep a good track of the cash flow of the company.

Let’s find out the main reasons for using invoices in buying and selling business transactions.

Why Companies use invoices?

Make payment collection easy

Rather than calling or emailing a well-served customer, sending an invoice make asking for payment more polite and professional. Plus, it's a good reminder for the customer of the payment due date.

Speed up the payment process

It's rare for customers to pay you before sending an invoice. Thus, an invoice makes everything speed up related to the payment process from the customer's end.

Help you generate accurate payment records 

Keeping in mind all the payments you are to receive or noting them down on spreadsheets is not an effective way to deal with payment recording. With an invoice, you can quickly generate well-organized payment records and track the payment records statuses effectively. 

Better visibility over finances 

With invoices, all your departments involved in the procurement process get a clear idea of what you've spent money on and why. Thus financial records get more transparent. 

Help with accounting 

Proper invoicing will help you with your companies accounts, audits, and tax process while providing you with reasonable evidence of your financial records.  

Differences between invoice and a purchase order

Now you have a better idea of what is a purchase order and what is an invoice. Thus we are sure you understand the difference between an invoice and a purchase order.

However, to make things easy for you below, we've listed the main differences of an invoice and a purchase order.

Key Info Purchase Order Invoice
Purpose To confirmation of an order To request for payment for an order
Sender Purchaser Vendor
Receiver  Vendor Purchaser
When it is sent Generated before the Purchase  Generate after the purchase

What are the similarities between an invoice and a purchase order?

Although these two documents have differences, one of the main similarities worth understanding is that both are legally binding documents.

Apart from that, another similarity of the two documents is information included, such as order details, mailing information, and price. The documents also consist of an invoice number, vendor contact information, …etc.

Purchase order or invoice?

These are both essential documents that involve a business transaction between a buyer and a seller. An invoice is an essential document to have from a legal standpoint while a PO is important for clarifications and to avoid conflicts, miscommunications, and misunderstandings.