When first learning about procurement, understanding the key difference between Purchase Order Vs Invoice may be challenging. It’s easy for even seasoned procurement teams to confuse the two phrases.
Failure to acquaint yourself with the purchase order process may allow you to ignore essential financial paperwork, overlooking vital facts that might negatively influence your company’s costs. As a result, it is crucial to know how invoices vary from purchase orders. Therefore, this article will explain in detail about Purchase Orders Vs Invoices, what they include, and how they differ from one another.
What is a Purchase Order?
A purchase order (PO) is a legally binding and official document outlining the goods and services the buyer wishes to acquire from the vendor at a predetermined price and in a specified quantity. These are sent from the customer to the supplier to be confirmed. Once the purchase order is accepted, it becomes a binding contract. A PO may be used by both parties to keep tabs on and organize their respective purchasing process and activities.
These days, a buyer may create a PO using either the vendor’s readily accessible purchase order system or their software for purchase orders and automatically send it to the seller through email.
The vendor may generate invoices automatically based on the Purchase Order data in their system of the procurement process. For instance, a merchant may instantly generate a PO and pass it on to a vendor using a purchase order generator.
Purchase orders typically include the goods the buyer wishes to acquire, the number of those goods, and the agreed-upon price.
Purpose of a Purchase Order
For one, the orders serve as legally binding contracts between buyers and sellers, standardizing the exchange of goods and services. This provision might safeguard both parties’ interests and contractual duties.
Second, it may ensure that everything in the whole order is well-grounded, well-organized, well-documented, and capable of avoiding or minimizing extraneous obligations or hazards. It also improves the buyer-seller relationship.
Third, it may help the buyer avoid making a purchase whose product criteria and specifications don’t align with what they need, providing a solid foundation to build a strategic procurement process. Finally, put together a fair plan for the amount and timing of the purchases.
For the retailer, this means avoiding providing product specifications, requirements, etc., that aren’t in line with what customers want. It also means quickly and easily summarising the sales data for each product, which helps assess the current sales situation and get a feel for stock levels.
Why is a Purchase Order Important?
Whether you manage a big or small business, you may find that it is more convenient to make orders using an online system that also handles billing and purchase orders.
1. It’s a Helpful Reminder of the Specifications the Client Specified
Let’s say there are adjustments to the established sequence. Having a purchase order to go back to might help you remember what was originally requested.
For any commercial transaction, this might assist clear up any misunderstandings between your company and the provider. Without a purchase order, for instance, you may waste time and money by submitting the same information many times.
2. It Aids in Keeping Tabs on the Shipment
Using a buy order, you may monitor the development of your order from the moment it is placed until it is delivered. Reports and analyses of expenditure patterns will benefit greatly from this data.
3. Your Stock Control is much Improved
Inventory stockouts and other problems arise when businesses lack clear inventory visibility and insight into their stock levels. In order to maximize productivity and efficiency, and to better control stock levels, a buy-order system may be of great help.
4. Prove that Your Company and the Vendor Reached an Agreement
Your company and the vendor may use the purchase order as proof of the agreement made between them since it is a legally binding document.
5. Order Anything from a Supplier
To order products or services, a purchase order is the standard form of documentation. Your purchase order will include the products you need together with the amounts you need. Include any other supplier instructions you see necessary, such as a preferred delivery date or preferred method to collect payment.
6. Obtain Authorization for the Purchase
A purchase order form is a letter of an official request for payment for products or services but is not a legally binding contract. Because of this, the supplier can’t start working on the order until they obtain formal approval from your company, usually in the form of a purchase order acceptance.
7. Enhance the Company’s Payment Plan
Order quantities and costs should be calculated in advance of starting a significant project in order to ensure that correct POs can be issued. The resulting more accurate budgeting should allow you to pursue such endeavors with more confidence.
What is a Purchase Order (PO) Number?
An individual may identify a purchase order by its purchase order number. A purchase order’s unique identifier is utilized only once.
Accounting software often generates this number instantly whenever a new sales invoice is created. The customer and the seller use it to track the transaction from beginning to conclusion and by the seller on subsequent invoices.
Reconciling orders requires PO numbers on invoices. Therefore, verifying that the goods stated on an invoice were bought and received is essential by comparing the invoice number to the corresponding purchase order number (PO number).
What is an Invoice?
An invoice is a receipt or demand for payment used in a business transaction. It is usually created by the finance team.
Following the delivery of a finished product or the completion of a service specified in a purchase order, the seller issues a regular invoice. After receiving the invoice the buyer commits to the terms of payment.
Let’s pretend you’re in the business packaging, and one of your vendors places an order for 200 more shoe packaging boxes. Include an invoice with the shipment that specifies the total goods or services quantity, the unit price, and the due date for payment. It is important to set clear expectations with a pre-approved invoice and to add the bare minimum financial terms for the vital part of the invoice.
If your company sells products, services provided, or does both, basic order details will typically contain the order details to send invoices. An invoice includes:
- Date of Invoice
- Invoice numbers purchase orders Item and service descriptions
- Conditional on the following payment schedule, charges on late payments, digital solution for electronic payments, and familiar procurement terms
- Applicable discounts
- Business taxes on purchase requisitions(if applicable)
- Contact information
- Expected delivery date and delivery method
- Invoice due date
- Methods of payment that vendor accepts for purchasing department
- Details about the seller’s and the buyer’s respective small businesses like billing address and shipping address
A sales invoice for a buying process is, in all fundamental respects, identical to an invoice template for sale, despite the fact that the word “purchase invoice” is not often used.
After the buyer has provided the vendor with a purchase agreement and the order has been verified and completed, the buyer will next produce a purchase invoice to reflect the transaction. It includes the same inventory management information as a standard invoice and a deadline by which the buyer owes to pay the vendor.
Why are Invoices Necessary?
A third-party tool to complete the payment process might make accepting customer payments simpler for small companies. It is also essential in larger companies. However, as explained below, formal invoicing software is recommended for record-keeping purposes.
1. Security from the Law
Invoices is a legally binding document that enables businesses to receive payment for the products and services sold. If you need legal assistance to collect what is due to you, you will have all the evidence you need at your disposal. It is a cost-effective method to get paid faster and gain protection.
2. Keeping Tabs on Money Owed
Sending a customer or client a formal invoice is a receipt of services rendered and a record of the official payment request due date. Invoicing is the most convenient method for keeping tabs on cash flow. In addition, this data is essential for yearly budget reviews and tax filings. The invoice lists important details processed internally for setting explicit expectations, like vendor name, order goods, mailing information, order placement, agreed price, financial terms, late fees terms, goods delivered, due dates, the total amount due, tax information, etc. It is a vital part of the client’s expectations.
3. Keep Detailed Records
In business, it is essential to document everything. For example, a customer’s outstanding balance and whether or not payment has been received may all be seen on their custom invoices.
Your profit and loss (P&L) statement and budget will benefit significantly from your having this data laid out clearly and concisely.
4. Easily Submit Your Taxes
To file their taxes, businesses must keep records of their revenue and expenditures for the preceding fiscal year. The tax process is simplified by having paid invoices serve as receipts.
Invoices, sales receipts, and paid bills are papers the IRS suggests preserving for at least three years since they provide evidence for the accounting entries you’ve made. You can quickly finish your company’s tax return if you keep track of the dates and amounts of your invoices.
Difference Between Purchase Order and Invoice
When it comes to the differences between both the Purchase Order and Invoice, here are the key factors –
| Purchase Order | Invoice |
|---|---|
| It is a confirmation of the order which the buyer sends to the vendor | It works as a reminder of payment which the vendor ships to the buyer |
| Purchase orders set the terms of purchases | Invoices define that a sale has happened. |
| It is generated when the buyer places the order | It is generated after the service or supply is done. |
| It helps you to prevent the overstocking of materials or inventory | It allows you to avoid duplicate invoices and overpayment to a particular vendor |
| You can manage and track inventory easily | You can manage and track finance and payments easily |
Similarities Between a Purchase Order and Invoice
It’s easy to confuse both purchase orders and invoices since they sound similar. Both involve exchanging information about a product or service for commercial gain.
A few common similarities between the two documents are –
- Both have a unique number
- Both describe the sales and services delivered
- Both describe the total value of purchases made or recurring purchases, inclusive of taxes
- They are crucial to the process of cost-cutting optimization
- In the purchase process, they provide more transparency
- Price, primary purchase data, vendor information, and delivery information are all included
- Both the Purchase Agreement and the Credit Agreement are Binding Legal Documents
Why Do Businesses Need Both Documents?
Since they’re both crucial, you can’t choose between a purchase order and an invoice. Invoices may be essential from a legal perspective, but purchase orders provide much-needed clarity and help avoid disputes.
With the use of invoices purchase orders (POs) and sales invoices, miscommunication may be avoided by clearly outlining the expected outcomes of the transaction, regardless of whether demand is rising, falling, or remaining steady.
Issuing Purchase Orders and Invoices
Forms like invoices and purchase orders may be easily understood and used. Such documents require precision. But even creating invoices manually or with a template, creating many invoices by hand is still a tedious and error-prone process.
As a result, conflicts or audits may be complicated by the loss or disorganization of manual records. Purchase invoices with the account of accounts payable and accounts receivable can be important financial documents for both the buyer and seller.
The good news is that time-consuming paperwork may be avoided thanks to digital PO and invoicing. In addition to saving on the cost of photocopying and postage, eliminating these two processes means that you may issue more purchase orders and invoices every day without breaking the bank. In addition, using a digital option is less complicated and more convenient.
You may consider using invoicing software online (Like Moon Invoice). However, make sure it has all the features your company needs, such as automatic payment schedule reminders, recurring billing, reporting, payment alternatives, activity monitoring, and more, before making a final decision.
How to Manage Your Company’s Purchase Orders Using Moon Invoice?
Keeping track of company funds using a desktop or mobile app is an excellent method to maintain order and maximize productivity. Moon Invoice has user-friendly, adaptable, and industry-specific invoicing software. It can help you create outstanding invoices.
For instance, Moon Invoice’s online invoice generator allows you to create customized invoice templates, and electronic money regulations, prepare purchase orders, sort out duplicate requests, automate VAT calculations, and create smart business reports. You can also collect money and manage payments with Moon Invoice.
In a large organization, different departments work on various large projects and it is a crucial part of accounting to maintain communications. Moon Invoice is a better way to send an invoice for the important role of finance management and remove the added burden from.
If you want to try our Online invoicing software for free – contact us NOW!
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
