Sorting through and understanding all the paperwork that goes into starting a business—and keeping it running—can get confusing. Purchase orders and invoices are just some of those documents that you want to get right from the beginning. Chances are you’ve stumbled across one or both of these documents, especially if you’re a B2B company. But what are they? Also, what exactly is the difference between a purchase order and an invoice?
In this article, we’re explaining what each document is and comparing purchase orders vs. invoices so you know how each document can serve your business.
Let’s dive in.
What Is a Purchase Order?
A purchase order (PO) is a document created by a buyer and sent to a seller. A purchase order’s primary function is to request a service or product to be delivered. A purchase order will show an itemized list of the requested service or product. A supplier or vendor has the option to approve a purchase order if they can fulfill the request, or they can refuse it.
Here’s an example of a purchase order:
What Will You Find on a Purchase Order?
On a basic purchase order, you will usually find:
- Date of purchase order
- Purchase order number
- Itemized list of products or services ordered
- Business name and address of the buyer
- Business name and address of the seller
- Payment terms and conditions
What Are Purchase Orders Used For?
In addition to initiating an order, a purchase order fulfills additional functions:
Documentation Between Buyer and Seller
Before an order goes forward, a purchase order confirms that both the seller and buyer are in agreement.
The purchase order reflects what’s required of the seller: which items they need to provide and when they must be delivered. The purchase order also reflects what’s required of the buyer: the total amount due after the deliverables are fulfilled.
Reference for Invoices
After a product or service is fulfilled, the seller will usually send the buyer an invoice. On the invoice, the seller should include the purchase order number as one of the reference numbers. This makes it easier to match the invoice to the purchase order.
Also, if a buyer wants to issue payment or if either party has questions, they can provide the purchase order number to quickly access the right documents.
If you’re efficiently managing your purchase orders using software, then you can better track your inventory. With your purchase orders, you can determine how much inventory you should have and when it’s time to restock.
What Is an Invoice?
An invoice is a document created by a seller and sent to a customer. The primary function of an invoice is to collect payment. On an invoice, you will also see an itemized list of the products or services rendered and the total amount due.
Here’s an example of an invoice:
What Will You Find on an Invoice?
When sending an invoice to collect payment, it’s imperative that you confirm the information is accurate so both you and your customer have a smooth transaction. When you break down an invoice, you will usually find the following sections:
If you’re sending several invoices, you’ll need some way to track them. You can make it easier to find them by including:
- Invoice date
- Invoice number
- Purchase order number
This section provides the information of the sender, the party that is receiving payment. This section should have the following information:
- Business name
- Mailing address for payment
- Contact information
An invoice should also reflect the customer’s information. This section should cover:
- Name of contact within company
- Customer’s business name
- Customer’s billing address
Itemized List of Products or Services
Itemizing an invoice is important for accurately calculating the total amount due. This reduces confusion and ensures that both parties are aware of the products or services delivered. Be sure to include the following:
- Invoice number
- Invoice date
- Payment terms (due date, late penalty fees, early payment discounts)
- Product or service description
- Agreed-upon price or hourly rate
- Quantity or number of hours
- Shipping costs (if applicable)
- Discounts (if applicable)
- Taxes (if applicable)
- Accepted payment methods
What Are Invoices Used For?
Like purchase orders, invoices also fulfill additional functions:
Similar to the check you receive at a restaurant, an invoice is sent letting the buyer know that it’s time to issue payment.
Many customers lead hectic lives, especially if they’re busy business owners. Invoices can also act as a reminder that the deliverables were issued and that payment is due.
Documentation Between Buyer and Seller
When paired with a purchase order, invoices act as another form of documentation between the buyer and seller. The itemized list breaks down each product or service delivered. Also, the total amount reflects the amount owed. An invoice acts as confirmation that the seller fulfilled their end of the transaction.
If you use invoice software, this information makes it easy to calculate the revenue your business generated for the tax year. Access to this information makes it easy to calculate and pay your business taxes.
The Difference Between a Purchase Order and an Invoice
You’ve learned about purchase orders. You’ve also learned about invoices. Now, let’s dive into the purchase order vs. invoice comparison.
The Creator and Recipient
Purchase orders are created by a buyer to signal they would like to purchase something from a seller. Once the purchase order is accepted and the seller delivered the items or services that were requested, they send an invoice to the customer to collect payment.
Purchase orders and invoices request different things.
When a buyer sends a purchase order, they are requesting for the supplier to fulfill that order. When a seller sends an invoice, they are requesting for the buyer to issue payment.
Thus, the objective of a purchase order is to obtain specific goods or services. The objective of an invoice, on the other hand, is to obtain payment for said goods or services.
Purchase orders and invoices are not sent simultaneously. To understand the timing, let’s view a business-to-business transaction step-by-step:
- An employee gets a purchase requisition for new computers approved.
- The purchasing department (buyer) issues a purchase order to a computer supplier (seller).
- The seller agrees to fulfill the order.
- Both parties agree on the requested items and payment terms. This information is documented on a purchase order and signed by both parties.
- The seller delivers the computers to the buyer.
- The buyer confirms receipt of the computers.
- The seller sends an invoice to collect payment.
- The buyer pays the invoice.
- The seller issues a receipt, confirming that payment is received.
A purchase order is always created first. An invoice is sent in response to a purchase order, but only after the deliverables were received.
A purchase order is created to confirm the agreed-upon transaction terms by both buyer and seller. An invoice is sent to confirm that the requested products or services have been fulfilled.
The Similarities Between a Purchase Order and an Invoice
Now that we’ve established the differences between a purchase order and an invoice, let’s explore how these documents are similar.
Purchase orders and invoices contain similar information to ensure the transaction terms are in writing and signed for.
Documenting the agreement between the buyer and seller reduces confusion during the transaction process. If a question or dispute arises between the parties, they can simply review the terms outlined in the purchase order.
The Legal Implications
When a buyer and seller sign a purchase order, they enter into a legally binding contract. The buyer is obligated to provide the products or services requested by the buyer. Similarly, the buyer is obligated to comply with the payment terms when they receive the invoice.
If a buyer fails to issue payment after the seller fulfills their obligations, the seller has the right to sue. They are entitled to the outstanding balance owed to them.
When creating purchase orders and invoices, it’s best to use software to streamline the process and keep track of all your business’s transactions. Paper-based systems, like purchase order books or paper invoices, are often outdated and inefficient. Skip the filing cabinets and start storing everything electronically.
Here are a few recommendations for purchase order and invoice software:
Purchase Order Software
Procurify is an excellent option if you’re a medium-sized business generating around 1,000 purchase orders per month. Creating and managing purchase requisitions, purchase orders, and even processing invoices is simple with their user-friendly software.
If you’re on the fence about Procurify, you can sign up for a free demo. Keep in mind that Procurify does not post any pricing options on their website, so you will need to request a quote if you’re interested in continuing with their software after the demo.
You can also create professional purchase orders in seconds using Spendwise. Their mission is to optimize various accounting functions of your business with their web tools.
Also, you might be happy to know that Spendwise posts their pricing on their website. With their basic plan starting at $9 per user per month, Spendwise is an affordable option for many businesses. You can also sign up for a free trial on their website.
A favorite among many small businesses, FreshBooks is a solid choice for generating invoices and receipts, as well as a host of other accounting functions. Their user-friendly interface makes FreshBooks simple to use and navigate.
With plans starting as low as $15 per month you can create and customize unlimited invoices and accept credit card payments online. Upgrading to higher-level plans unlocks additional features, like unlimited proposals or onboarding up to 500 clients. Also, FreshBooks offers a free 30-day free trial to see if they’re a fit for your business.
Invoicely makes it easy for small business owners to create, customize, and send invoices. What’s great about Invoicely is that their free version is equipped with everything you need to start creating invoices today. If you’re bootstrapping, then this free software is perfect for you.
With Invoicely, you can also upgrade to the basic plan for $9.99 per month. This unlocks all of Invoicely’s features, like generating quotes, accepting credit card payments, and adding team members to your account.
The Bottom Line
Purchase orders and invoices are critical to initiating an order and then completing it. Gaining insight into each document’s function ensures that all parties understand the agreement of a transaction.
To summarize, a purchase order is used to create and confirm an open order. After the deliverables are fulfilled, an invoice is then created and sent to collect payment.
Both purchase orders and invoices contribute to the success of your business. Using online software to generate, document, and send your purchase orders and invoices will increase overall efficiency. If you have the extra cash flow, consider investing in paid purchase order or invoice software—or robust accounting software—to further optimize your business operations.