Spend any time in the world of business and you'll eventually use both purchase orders and invoices. Small businesses and larger companies alike rely on these financial documents as part of their purchasing and procurement procedures.
But if you’re new to the business world, you might be curious about the difference is between a purchase order and an invoice. In this article, we’ll cover the similarities and differences between invoices and purchase orders and show how each might relate to your business.
What is an Invoice?
An invoice is a document a business sends to a client. An invoice acts as a request for payment for the delivery of goods or services.
For instance, a vendor might send an invoice to a buyer after they make a purchase of an agreed-upon order. While technically, an invoice is not a legally binding document, it communicates clear expectations for payment between the buyer and seller.
When to use invoices
An invoice is sent to a client after they receive the goods or services they have requested. Invoicing your client after the job is completed ensures parties are satisfied with the arrangement before payment is requested.
What should an invoice include?
If you’re drafting an invoice, you should include the following details:
- A professional header identifying your small business or company
- The contact information for your company, including its street address
- The contact information for the buyer
- The invoice number
- Date the invoice was prepared
- Delivery date
- Description or quantity of goods/work performed
- Price of goods delivered or service rendered
- Total amount due
- Payment due
- All payment options
- Payment terms and deadlines
The invoice number is particularly important for a buyer’s accounting department, who might need the document to manage payments, as well as keep track of their company’s cash flow.
Streamline your invoicing process with a template for creating invoices
Naturally, if you manage a small business, you probably have enough on your plate without having to worry about crafting invoices and other documents. Invoicing templates enable you to quickly create and send custom invoices straight from your phone or device.
You can streamline your invoicing process by sending invoices to your clients via email, text message, and even social media platforms like WhatsApp.
What is a purchase order?
If an invoice is sent by the seller to the buyer, a purchase order is sent by the buyer to the seller or supplier. Basically, the keyword here is “order.” When you place a purchase order, you’re placing an order for the goods or services offered by a vendor.
Once the seller accepts the purchase order, it becomes a legally binding contract. This means that once the order request is approved by the vendor, both parties are bound by its stipulations as in any other contract.
This can actually be to your advantage because it eliminates the need to draft any other legal documentation to ensure that both parties adhere to the arrangement, though it also means that you'll be legally obligated to fulfill your end of the agreement.
When to use a purchase order
A purchase order (PO) is a vital part of the purchasing and procurement procedure for your business. Larger companies may even have a purchasing or procurement department that handles the creation of purchase orders, though smaller businesses may have their own method of handling these requests.
Typically, a person within your business will need a particular item or a service to be provided. They may then make a formal request for the purchase of these goods or services. If this request is approved, it will be converted into a purchase order.
What should a purchase order contain?
While a particular vendor may have individualized expectations for the contents of a purchase order, typically these documents contain the following details:
- PO number
- Date of purchase
- Buyer details
- Quantity of goods and services
- Price of products or services
- Total amount due
- Payment terms/payment due date
- Delivery address
As with an invoice number, the PO number can contain valuable information for your accounting department, which can use this data to manage your cash flow and stay on top of the books.
Similarities between a purchase order and invoice
You may have already noticed some overlap in the contents of purchase orders and invoices. Indeed, these documents have a lot in common, including:
Ability to communicate information about the price of products or services
Invoices and purchase orders both contain the details associated with the purchase of merchandise or a particular service. This would include a description of the service itself, or a description of items being sold, and the price.
Helps accounting departments track expenses
By numbering the POs and invoices, accounting departments are better able to stay organized and keep track of your payment schedule. A numbering system can also be integrated with existing software to optimize your business' accounting needs and stay on top of every detail.
Both documents streamline the procurement process
Finally, both POs and invoices streamline the procurement process by documenting the expectations between the buyer and vendor, setting terms for payments, the delivery date, and other important details about the transaction.
An invoice or purchase order number can also be used to integrate with logistics and inventory software to further optimize your inventory management and purchasing process.
What is the difference between a purchase order and an invoice?
The most important difference is that vendors send a purchase order to track and manage the purchasing process. An invoice, on the other hand, is an official payment request vendors send to buyers once an order is completed.
Most importantly, purchase orders and invoices have two distinct purposes. A purchase order is used to make a purchase, while an invoice is meant to collect money from a buyer or client.
Think of it this way: An invoice is used when you intend to receive money, while a purchase order is used when you intend to spend money.
Who sends a purchase order vs invoice
The difference in the purpose of a purchase order vs invoice will also be reflected in the person who sends each financial document. An invoice is sent from the seller to the buyer to communicate order details and request payment. But a purchase order is sent from the buyer to a vendor to place an order for a particular set of goods or to request a service.
When to send a purchase order vs. invoice
A purchase order and invoice are each sent at a different time in the procurement process. A supplier will typically send an invoice to a buyer after they receive their requested goods (or after a service has been rendered). But a buyer will send a purchase order to a company or vendor to communicate their desire for a particular service or set of goods.
Only POs are legally binding
Contrary to what you may hear, an invoice is not a legally binding contract. The only thing an invoice can do is communicate a request for payment. A purchase order, on the other hand, becomes a legally binding document once a vendor accepts the order. This means that both you and the vendor are legally responsible for upholding the terms of the contract, including the agreed-upon price.
Should companies use invoices and purchase orders?
Now that you understand the difference in purchase orders vs invoices, you might wonder whether companies need both of these documents. The short answer is "yes." Here's why.
Businesses are constantly evolving, and the digital revolution has caused the world of commerce to operate at near-breakneck speed. Utilizing the PO and the invoice might seem like an added burden, especially if you're operating a small business with limited staff and not much room for a full-fledged accounting department. But using invoices and POs can help you manage your selling and procurement process with ease and ensure you keep track of your payment schedule.
Some businesses address these demands by implementing financial software to manage their purchase orders and invoices. At Invoice2go, a Bill.com company, we offer innovative solutions through our invoice generator, as well as providing the latest tools that let you send invoices right from your smartphone or wireless device.
Is software the solution?
According to the American Productivity and Call Center, today's top-performing businesses fulfill their POs electronically. E-procurement is increasingly the name of the game, which means that companies will have to increasingly adapt to this digital landscape by relying on apps and other digital products to interface with companies that have come to depend on online tools.
Invoice2go can help you to adapt by providing you with templates and an app that makes invoicing smoother than ever so that you can focus on growing your core business.
Frequently asked questions
Hopefully, by now, the difference between purchase orders and invoice procedures is clear. Of course, we understand that you might still have a few questions. Here are some of the most common questions we hear at Invoice2go.
A purchase order is not the same as a bill. A purchase order is a request for merchandise or for a service. While POs can establish payment terms, these documents should not the same as a bill. In the rare case that a vendor requests payment upfront, they will send invoices to indicate this expectation prior to fulfilling their end of the contractual arrangement.
Since POs are legally binding, they do not require a separate contract. That means that when a purchase order is accepted by the vendor, it has all the legal weight of a contract.
While there may be occasions when a separate contract may be desirable (e.g., to spell out additional terms or conditions of the arrangement), the purchase order alone is enough for both parties to enter into a legal arrangement.
A purchase order and an invoice will each have a number. The purchase order number is primarily used for accounting purposes, helping financial personnel monitor expenses. A purchase order number may also be used internally when the procurement process demands approval before purchases can be made. These numbers can be used to document POs once they are given final approval.
If you receive an invoice, your vendor may or may not have a deadline for payment. Likewise, when you create an invoice, it's up to you to establish a deadline for payment.
Some companies prefer to simply state "payment due upon receipt" to fast-track the payment process. While a deadline of 30 days might be appropriate, you might also wish to send a payment reminder to your clients before assessing any late fees.
Late fees and other penalties should be itemized on the invoice itself, though business courtesy suggests that you discuss this with your client ahead of time. Of course, if you receive an invoice from a vendor, you can sidestep any late fees by paying your bill as soon as possible.
Managing your accounts payable in a timely manner will spare you not only a late fee but also the headache that comes from letting your invoices pile up!
Helping you navigate today's business world
At Invoice2go, we specialize in providing innovative solutions to help you navigate today's changing climate. With our state-of-the-art tools and our mobile app, your company can have the agility necessary to compete in the fast-paced world of today's business.
We can help you create and send invoices, as well as keep tabs on every step of the sales process. Curious to learn more? Try our services risk-free for 30 days.