Purchase Order vs Invoice: Understanding the Differences

We all make mistakes 

Especially with business concepts, for example, you could think that a purchase order is the same as an invoice. After all, aren’t both key parts of the procurement process? 

And on top of that,  the two of them are documents. Pretty similar, right?

Well, not exactly. 

A purchase order and invoice are key documents of every procurement operation, but some differences must be understood. 

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What’s a Purchase Order? 

A purchase order or PO  is a document businesses create and send to a vendor when they want to buy something. The process usually starts when you as a company, decide on buying a product from a supplier, and send the document as an official outline of what are you acquiring, along with other critical expectations, like delivery timelines. 

Simple, isn’t it?

What Information Does a PO Include?

• Purchase order number: A code that is meant to help you identify the document.
• Date: This is an important piece of information as it states the date the PO was issued 
• Buyer and seller details: Names of both parties involved 
• Item description: The exact description of what are you buying. 

What’s an Invoice?

If we define a PO as the document that your business sends when you are ready to make a purchase, then we can say that an invoice is the document that the supplier sends back to you, once your order has been fulfilled and payment is pending. 

What Information Does an Invoice Include?

• Invoice number: A unique identifier for the invoice. This helps both you and the seller keep track of transactions easily.
• Date: Just like with the PO, it sets the date of issuance.
• Buyer and seller details: Names and relevant information of the parties.
• Item description: What has been purchased and delivered. 
• Payment terms: The amount due and expected payment date. 

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Okay, so far, things might look similar, and while it’s a purchase order and invoice share some elements, the differences cannot be denied. 

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Differences Between PO and Invoice

Who creates it?

Just like we saw above a purchase order is created by your business, an invoice in other hand is created by the vendor. 

Purpose 

A PO is an official order form that helps you keep track of your needs. The invoice is the seller’s request for payment after delivering the goods or services.

Timeline

The PO is the beginning of the purchase process, so it’s sent before the actual purchase is made. The invoice is created once the order has been completed. 

Use

A purchase order helps you track what you’ve requested and keeps your procurement organized. On the other side, the invoice serves as a reminder and record of your financial obligations.

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Benefits of Purchase Orders 

Organization

Purchase orders provide a clear, written record of what you are ordering, including quantities, prices, and delivery instructions. This way you can prevent misunderstandings and be sure that you and the supplier are on the same page. 

Budget control

Another huge benefit is that POs help you manage your budget by allowing you to track spending against approved purchases.  Overspending won’t be a concern anymore.

Legal contract 

We know that for every business owner having a legally binding contract gives peace of mind. A purchase order serves as a formal agreement between you and the vendor. If there are any issues regarding the order, having a well-detailed PO, can provide legal protection and serve as evidence of what was agreed upon.

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Benefits of Invoices 

Tracks payments

Accounts payable, anyone? Well, Invoices serve as a record of what you owe, making it easier to track payments and have a better understanding of your cash flow.  

Records

Invoices are essential for bookkeeping and accounting. If something is not recorded where it should, how can you be sure that it happened at all? Invoices come very in handy when the time to prepare financial statements and conduct audits arrives. 

Compliance

Properly documented invoices are quite important for tax purposes. They help you keep a record of deductible expenses and ensure that you don’t miss or ignore any regulations. 

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Better supplier relationships

Money doesn’t buy happiness, but it certainly helps in having better relationships, at least with your suppliers. If you pay on time you can be confident in the positive nature of the relationships with your suppliers. This can lead to better terms, discounts, and reliability in the future.

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Best Practices for Purchase Orders

Template 

Having a consistent purchase order template helps streamline the process and ensures that all necessary information is included.

Automate

Let’s be honest here, manually creating a PO it’s probably one of the most dreadful tasks, you not only waste time, but you also face the risk of making a mistake and ruining the whole process. Automation removes that situation from the equation and takes care of every step, without manual errors. 

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Approval workflow

And speaking about automation, another important aspect of having a software handling PO is that you can set a very simple-to-follow approval workflow, making sure that the right people are notified right when it’s needed. 

Communicate 

If you want your suppliers to be aware of any change or question, you need to develop open communication with vendors regarding delivery expectations and any special instructions. Don’t wait until it’s too late. 

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Best Practices for Invoices

Be on time 

For the suppliers out there, send invoices as soon as the goods or services are delivered. For the business leaders, be sure to have an optimized system of invoice management installed. More of this in a bit. 

Use clear terms

Ensure your invoices are clear and include all necessary information, such as item descriptions, quantities, prices, and payment terms. This reduces confusion and expedites payment.

Follow up

This is a good practice for every accounts receivable process, if payment is overdue, don’t hesitate to follow up with a friendly reminder. Communication is important, but when it comes to payments it’s even more fundamental. 

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Automate invoice management

Whether you are receiving or sending an invoice, automation is something that you must consider ASAP. Why? Because using invoicing software to automate the creation, distribution, and management of invoices, reduces manual errors, saves time, and allows you to track invoice statuses easily.

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