- November 4, 2021
Invoice vs. Purchase Order: What’s the Difference
Those new to the procurement process may struggle to differentiate between purchase orders and invoices. Even veteran procurement teams may have different definitions of the two.
If you fail to understand the difference between purchase orders and invoice documents, you may fail to grasp the finer points of the company’s finances.
In this guide, you will learn about the difference between PO and invoice documentation within the context of procurement.
What is a Purchase Order?
Purchase orders are often known by the simple abbreviation of PO. This is an official document designed to kickstart the purchasing process. It is the buyer who is responsible for delivering the purchase order.
Only when the vendor accepts the document does it become legally binding. The vendor may also reject a purchase order.
Purchase orders are designed to outline the goods and services requested by the buyer. It will include the date the purchase was made, the quantities of each product/service, and the agreed price.
If there are any issues regarding the price, vendors may choose to negotiate before accepting the order and before the document becomes legally binding.
What is an Invoice?
On the other hand, an invoice is delivered after the vendor has fulfilled their part of the obligation. Vendors send invoices after providing their products and services.
Standard invoices will include a detailed readout of goods and services delivered and the amount of money owed.
It may also include details regarding any discounts applied or a specific payment schedule.
Invoice vs. Purchase Order: What’s the Difference?
So, what is the difference between a purchase order and an invoice? At first glance, they seem remarkably similar, but they are not.
Master the differences to enhance the purchase order and invoice process. When there’s confusion between the two, confusion reigns, and mistakes are made.
Firstly, let’s focus on the differences between the two documents. Here is an overview of how purchase orders and invoices differ:
- Who Sends? – A purchase order will be sent by the buyer to a vendor, whereas the vendor delivers invoices to the buyer.
- When is it Generated? – Purchase orders are requests for goods/services. Invoices are generated after an order has been fulfilled, and it is time for the buyer to pay.
- What Does it Say? – Issued purchased orders define the terms of an imminent purchase, whereas an invoice is essentially a sales confirmation.
- Why Use It? – Purchase orders help organizations because they prevent inventory overstocking. Invoices, on the other hand, protect both parties against duplicate payments and overpayments.
- How Can You Use It? – Purchase order invoices are useful for helping vendors track their inventory. Invoices are useful for organizations looking to track income/expenses and prepare for tax season.
When you consider the purchase order vs. invoice, there are considerable differences between them. It’s not difficult to see how confusing the two could be internally catastrophic.
It is not uncommon to see purchase order invoices confused with sales invoices. They are tough financial terms to grasp. Some experienced businesses even consider them to be interchangeable when they are quite clearly not.
While both have the similarity of being types of commercial communications, the time they occur is different.
So, what do they have in common?
- Both are types of commercial communication used as evidence for purchases/sales.
- They act as financial documentation to help organizations optimize their spending.
- Both documents provide transparent insights into the overall purchasing process. They prevent confusion on both sides, which could later cause disputes and delays.
- Each one contains important details about the transaction, including vendor details, buyer details, basic order details, price, and even shipping information.
- An invoice and a PO are legally binding documents that can be presented in court in the event of a dispute.
- Keep accurate records of purchase orders and invoices long into the future as they are vital for internal and external audit trails.
Despite the similarities of PO vs. invoice, procurement companies will usually handle both at some point. Thankfully, much of the process of accepting and issuing these documents can be automated using modern technologically-driven solutions.
Do You Need Both?
Nobody likes to deal with excessive documentation. It may be tempting to put the bureaucracy on the backburner during busy periods, but this is a mistake. Every relationship in business is constantly evolving, and without solid documentation, it becomes impossible to handle purchases and sales transparently and smoothly.
Some people may say that you can choose to favor the purchase order or the invoice, but this is simply untrue.
Invoices are simply a bill, but a purchase order helps to provide clarification for both parties and can play a crucial role in resolving disputes later.
For example, if Company A orders 72 office desks from Vendor B, they will issue a purchase order. Vendor B delivers 72 office desks with the associated invoice only for Company A to send them an email saying that they actually wanted 74 desks.
Vendor B can protect its interests by referring back to its legally binding purchase order. Company A realizes they made a mistake and requests two more office desks separately.
Without that documentation in place, the relationship could get messy, which is a problem for both parties.
5 Ways to Speed Up Customer Payments with Invoicing
The greatest challenge for any supplier is encouraging fast payment of invoices. One study found that 80% of small businesses experience late payment on their goods and services.
Most small businesses are in a constant battle to maintain a positive cash flow. All it takes is a major client to fail to pay on time, and suddenly the business is unable to find the liquidity to pay their bills and keep moving.
In the discussion over invoice vs. purchase order similarities and differences, it’s not uncommon to be unable to see the forest for the trees. Here is how you can speed up customer payments now.
1. Automate the Process
Save your organization time and effort by automating the billing process, particularly when it comes to recurring billing.
Digital platforms enable businesses to store credit card information and deliver automated receipts securely. This ensures fast delivery, so the client is not waiting weeks for you to write an invoice manually.
2. Create a Professional Invoice
Did you know that customers are more likely to repurchase from businesses and pay on time when they receive a professional invoice?
The simple act of including a logo on your invoice could increase your customer repurchasing rate by up to 15%, for example.
Use a smart invoice template and give your business the professional look it deserves. Many modern invoice templates even include saved line items, which allow you to create invoices for your clients in a matter of seconds.
3. Automate Late Payment Reminders
Clients who fail to pay on time may have made an honest mistake and forgotten about the invoice. Automate late payment reminders. Deliver them the day after payment was due.
Schedule additional reminders. In the event, they receive no response, escalate the issue.
4. Be Clear in Your Language
Leave no room for confusion by issuing invoices with transparent, obvious language. Include detailed language regarding the invoice and the goods/services delivered.
These payment requests should include the same language on purchase order invoices to limit confusion and avoid potential disputes.
5. Use the Carrot, Not the Stick
Tempted to append a late fee to deadbeat clients? Research shows that clients who have failed to pay are unlikely to be hurried on by the presence of a late fee. In some cases, clients have delayed payments even longer since they have already incurred the penalty of late payment.
Incentivize early payments via both the purchase order and the invoice. Advertise these early payment discounts. A simple 5% discount for advance or early payment reduces the chances of experiencing a late-paying client.
When it comes to the invoice vs. purchase order issue, it is clear that there are considerable differences between the two. Take the time to understand their unique roles within your organization.
Much of the process of accepting purchase orders and issuing invoices can be automated to make your life easier. For solutions that modernize every aspect of your business, look no further than CBX Software.
At CBX Software, we make it simple for businesses to collaborate with vendors and suppliers. Learn more about our approach to modern business solutions and schedule your demo now.