Purchase orders and invoices both contain information about your business’s financial activity. They both show if your transactions are purchases or sales. They both also help you to maintain a steady cash flow. So when it comes to purchase orders vs invoices: what’s the difference?
What Is An Invoice?
An invoice is a document that you give to your customer after they buy products or services from your business. It is used both to record the transaction and to collect payment.
Invoices outline what the client purchased, in what quantity, when they purchased it and at what price.
Invoicing is a legal requirement for any business that sells products or services, no matter what size.
What Is A Purchase Order?
Purchase orders are vital for a well-organised purchasing process. A purchase order (PO) is a legally binding document that the buyer creates and sends to the seller. Unlike an invoice, this document is generated when the buyer makes an order, not after.
Essentially, it is a list of items that the buyer wants to acquire. It contains specific order information, such as the quantities and descriptions of items requested by the customer. As well as this, it details any payment conditions and delivery information.
Purchase orders are typically used by small businesses buying large quantities of items. Unfortunately, they generate extra paperwork, which is inconvenient for small transactions and time-consuming for smaller teams.
Buyers can also place customised orders for large shipments or recurring purchases. A standing purchase order enables a buyer to buy the same products multiple times with the same PO number.
After the purchase order is authorised, the seller is accountable for delivering the agreed-upon goods or service. During this time, you could also produce and send an invoice to the customer. The invoice should summarise what commodities were given, the appropriate quantities, and the amount owed.
For example, the seller might have net 30 payment terms and require payment within 30 days after sending the invoice.
What Information should you include on a purchase order?
- Issue date
- Purchase Order Number
- Products needed and the quantity of each product
- Terms for payment, such as “paid upon delivery” or specific payment date options
- Notes
- Tax Information
- Delivery date
- Vendor Contact Information
- Delivery location
Advantages of purchase orders
- They accurately describe all of the details of a purchase. By having every element explained, written out, and documented, you can minimise future disputes or confusion.
- Small businesses can use purchase orders to inform their suppliers what goods and services they need and when they need them. This promotes efficient and organised processes. It also allows the vendor to verify that it can offer the desired products and services before committing to delivery.
- They can assist the buyer and seller in keeping accurate and complete records for auditing and financial statements.
- They help with budgeting if you’re planning a large project. You must calculate order quantities before the project begins in order to create accurate POs. This also gives you a better notion of how much you should budget for the project.
- They are useful for more than simply large projects. Even when dealing with day-to-day purchases, the price and quantity sections on purchase orders provide information about how much your business needs to sell in order to earn a profit. It’s also useful for budgeting to be able to review previous purchase history.
- Purchase order numbers allow for easy tracking of purchases and make it easy to query the status of an order.
Simply put
A purchase order is a list issued by a customer for a business to deliver specific products or services. An invoice is a bill sent by the seller once the goods or services have been delivered or completed.