Invoices vs Purchase Orders: Knowing the Difference & When to Use Each
There’s no way around it – managing your income and expenses is critical, even if you’re just a small one-man (or woman) show.
But how you go about managing your finances is key. For instance, are you using invoices, bills, or purchase orders? And are you using electronic or manual forms of tracking them?
As you’ll come to learn in this article, what you use really does matter. It can be the difference between losing money and getting paid on time.
So next, we’re going to a look at the differences between invoices and purchase orders and when you should use each.
Let’s review.
What is a Purchase Order?
Simply put, purchase orders are a tool businesses large and small can use to ensure they don’t go over their budget. Without them, it’s easier to lose track of expenses and make errors.
Plus, trying to validate delivery reports can become tedious.
Let’s say you order 100 lbs of gravel from a vendor over the phone. You agree to a price, but upon delivery of your product, you’re billed a much higher price.
The two of you can argue all day about the agreed upon rate, but with a purchase order, this problem is non-existent.
Or imagine trying to manually process a backlog of paperwork only to find out you don’t have enough money to pay your contractors. Purchase orders will identify duplicate payments sent to vendors that rendered you broke.
But why go through this? An automated purchase order would eliminate this human error.
This seems to be a consistent issue within businesses. According to one study done by Rubberstamp.io, manual processes (i.e. Excel spreadhseets) increase the likelihood of spending errors.
Yet, nearly 42% of businesses still use them. And over 80% of businesses make spending mistakes because of it. You can easily resolve this by using an automated purchase order platform.
Instead, 82% of companies are wasting billions of dollars on paper.
By using manual processes for your company spending, you’re putting your company at financial risk.
How to Reduce Mistakes with Requisitions and Purchase Orders
So how can purchase orders help you reduce spending errors? By using an automated purchasing process, you can easily check and balance your expenses.
It’ll also:
- Reduce mistakes
- reduce how long you spend monitoring spending
- Protect your budget
- Protect your business and bank account
- Allow you to manage business spending from anywhere
Let’s review the best practices for using purchase orders:
- Step one: A requisition (request to purchase) is sent to your business for approval.
- Step two: Once requisition is approved, you create a purchase order detailing the agreement.
- Step three: Ensure the receipt is valid and the quality of the purchase (delivery of the right product).
- Step four: Payment and delivery was fulfilled.
It’s all very simple. But be careful on step four if you’re doing things manually. This is where payments are sometimes submitted twice, such as when the order isn’t properly closed.
What Does a Purchase Order Include?
A purchase order is a document that showcases activity between the buyer and seller. On this document, you will see:
- The product/service name
- The quantity of the product/service
- The price per product/service
- Additional terms, discounts, etc.
- The purchase order (PO) number (used on all documents)
- Time frame for payment
- The ETA for the project delivery
- Name of the requester and approver (of the requisition)
Again, when using an automated software, you can easily track orders, access reports, and process payments. No more sifting through tons of paperwork for hours.
At the end of the day, purchase orders help by:
- Making orders easier to track
- Provide legal protection
- Prevent audit problems
- Make the process easier for vendors
Anything you can do to make buying and selling products/services is worth doing.
Who Creates Purchase Orders?
It depends on the size of the business. For instance, in a larger company, it’s the Purchasing Department that handles the creation of purchase orders (after receiving the requisition).
Then in small and medium-sized businesses, it’s sometimes the requester that creates the PO on the spot. This is the case for construction sites, event locations, and so on.
How Are Purchase Orders Different from Invoices?
The primary difference between a purchase order and invoice is what they display and how they’re used. For instance, you send a purchase order to suppliers to order products or services.
Then the supplier sends you an invoice for payment. Purchase orders are used by businesses to place and track large orders.
It allows your business to manage spending, budgeting, and delivery of product/services.
Purchase orders are from the buyer, while invoices are from the seller. The purchase order is very detailed, itemizing the product or service and the amount of each.
Plus, it includes detailed descriptions of each item, the pricing, and the ETA for the delivery. Once you approve the purchase order, the invoice goes out to the purchaser.
It’s common for small businesses to forego using purchase orders until they start to grow and expand. One way to remember the difference is that POs come before the transaction and invoices come after the transaction.
Now, let’s take a closer look at what an invoice is and how businesses use them.
What is a Sales Invoice?
A sales invoice is a document businesses use to show what a customer owes for a product or service received. It establishes an obligation between the buyer and seller, which too is legally binding.
Invoices are useful for both ensuring your business gets paid and keeping track of accounts receivable. These records will come in handy when it comes time to do your business taxes.
What’s Included On an Invoice?
Like with a purchase order, there are key details provided on an invoice document. For example, your invoices should contain:
- Date of the invoice’s creation
- Business names and addresses of the buyer and seller
- Contact names
- Item/service descriptions
- Terms of payment (i.e. “due in 30 days, etc)
- Payment adjustments (discounts, credits, etc)
Now, there are different ways you can structure your invoices, depending on your business and clientele. You may have a different invoice for your corporate customers with larger orders than you do your mom-and-pop shops clients.
By using invoices, you can ensure:
- You’re paid on time
- Transparency regarding company spending
- Easier management of payments
- Easier audit trails
- Legal protection
Who Sends Invoices?
It’s common for invoices to get confused with purchase orders. However, purchase orders record a customer’s request, which is sent to the supplier or vendor for approval and distribution.
However, the supplier or vendor creates the invoice and sends it to the customer for payment. It’s not uncommon for a supplier to demand a purchase order for orders over a certain amount.
You can either send paper or electronic invoices using a software like Invoicely. Using electronic methods makes it easier to keep track of your sales records.
This, in turn, helps to avoid confusion between the buyer and seller and makes tax time seamless.
You’ll find freelancers, small business owners, local service providers, and other similar businesses submitting invoices to customers. This is normally done by the owner, the finance department, or individual freelancer.
How to Manage Business Invoices
Today, there are many ways you can create and manage business invoices. With software, you’re able to quickly and easily create professional invoices.
You can email these to clients using your desktop or mobile device. Your clients can then pay your invoice in just one click using a variety of methods (credit/debit card, PayPal, Stripe, etc.).
If you have a bookkeeper or accountant, they can handle the system for you. Plus, it’ll make their jobs a whole lot easier!
How Are Purchase Orders and Invoices Similar?
Sure, there are a lot of differences between the two, but there are similarities as well.
For instance, both ensure your transactions are legally binding. It shows an agreement between the buyer and seller/vendor and the required actions.
Both documents contain key details about the order, mailing addresses, and rates. There’s a unique number created for each invoice and PO as well.
When Should You Use a Purchase Order or an Invoice?
To sum up everything, you’ll find that both purchase orders and invoices are useful business tools. They both play important roles in business transactions.
When it comes time to choose which document to send, just stop and think – am I the buyer or the vendor/supplier? If you’re the buyer, then you’re sending a purchase order to the company you’re purchasing from.
Then if you’re the vendor or supplier, then you receive the purchase order. And in return, you send the buyer an invoice for the products or services you delivered.
It’s really simple. But to make things even easier, be sure to look for a quality invoicing software that can make your business look professional and ensure timely payments.
Do you have experience with purchase orders and invoices? Let us know in the comments the methods you use to ensure your business transactions are seamless!