When to Use Purchase Orders and When to Use Invoices
Regardless of the size or industry, if you’re a selling business there’s always two parties involved; the buyer and the seller. The buyer would be your customers who are looking to purchase goods or services, while the seller (or “vendor”) is the party that is extending the goods.
In order to track inventory and sales, businesses must use two important documents; a purchase order and invoice.
Because these documents are similar, like both being legal documents and involving buyers and sellers, they’re often confused. But, it’s important for you to understand the differences between the two documents, and when to use the purchase order or when to use invoices.
What is a purchase order?
A purchase order (PO) is simply a document that indicates the types, quantity of products, and services being sold by the supplier, as well as agreed price the seller would offer for purchasing.
The purchase order form is created by the buyer, sent to the supplier or seller, and should contain the following
- Date of issue
- Purchase Order Number
- Details of Goods
- Shipping Details
- Name and Address of Buyer
- Name and Address of Seller
- Terms and Conditions
Purchase orders are commonly used whenever a buyer wants to purchase supplies or inventory on account and needed to fulfill orders and process payments. In other words, a purchase order is created before an invoice is sent since it defines the contract of the sale.
Also keep in mind that having a properly managed purchase order system will quickly share information like what’s been ordered, shipped and received — but not invoiced.
Blanket purchase orders are POs made in bulk. These are typically used when a buyer and vendor have a strong relationship. In special cases, purchase order financing can be extended (if the companies are able to reach mutually agreed-upon terms and conditions).
What is an invoice?
An invoice, which is also called a “bill,” “statement” or “sales invoice,” is a document requesting a payment for the goods of services that have been delivered.
An invoice is prepared by the seller, sent to the buyer, and should contain:
- Date of Issue
- Invoice Number
- Purchase Order Number
- Quantity of Goods Sold/Services
- Agreed Prices
- Discount (if any)
- Taxes (if any)
- Total Amount Due
- Due Date
- Name and Address of the Buyer
- Name and Address of the Seller
If you want to speed up the payment process, add your logo, offer incentives like a discount for an early payment, and use an electronic invoicing system.
Invoices are needed to keep cash flowing into your business, as well as a way to track your earnings and expenses.
A purchase order can be concerning items such as a water cooler purchase order. You make out the purchase order and send it to the water cooler business and they come to your business and see if you want the water cooler hooked into a water line or do you water those big bottles brought in? You decide which and make a purchase order.
Maybe you’ve decided to get new desks in your office because you are sick of the old chipped up ones you have been using for 5 years. You call the office supply store and they come to your office and measure the space, see what colors you want and if you want some of their additional do-dads — like cool chairs in cool colors. Then the office supply store writes up a purchase order.
You can also look through a catalog of sorts online and pick out your desks, chairs — and how about the extra cords you want. Computer screens, anyone? Anyone want those, protect against carpel tunnel boards? The office supply places then writes up a purchase order and lets you know when these items will be delivered to your place of business.
While all of your items are being delivered to your business — they usually hand you a copy of the purchase order. Then, in about a week, you will receive an invoice, billing you for those items you just bought.
Summary — simple terms
Think of a purchase order as a proposal that is made to a seller that lists the goods, products, services that are needed along with the due date and final cost.
Essentially a purchase order outlines the details of a contract between the two parties. Once approved by both parties, the seller issues the buyer an invoice which marks the confirmation of the sale and completes the transaction.
Purchase Order — stuff you are buying that will be delivered to your business. Or stuff a business is buying from your business. Purchase order management is a vital part of any small business.
Invoice — bill for the goods or services being purchased. The bill you send to the other business for what they bought from you, OR the bill they sent to you.
Purchase order software and invoicing templates can both be used to help facilitate the exchange of goods and services.