by Prasanna Rajendran, Vice President at Kissflow
You might have some knowledge of what “Invoice” entails, but “Purchase Order” may come as a new term to you. Although the contents of both might be similar, they serve entirely different purposes. Even seasoned procurement professionals can confuse the items of these two procurement documents while drafting them.
When it comes to your business’s financial pursuits, being compliant and organized depends on your ability to understand the purpose and subtleties of these two items. They also enable you to keep up a healthy cash flow, which is necessary to make sure that your company is prepared to deal with any unforeseen financial circumstances.
But how do these two documents differ from one another? Let’s find out.
Difference Between Purchase Order and Invoice
In this article, we will explore different aspects of a purchase order and invoices: which one comes before the other, what does each consist of, and why is it essential for your business:
1. Definition.
If you are new to procurement terms and processes, it is important first to understand what each term entails:
a. What Is PO?
A purchase order, commonly referred to as a PO, is the formal document that a buyer sends to a vendor to track and manage the purchasing process. In simple words, it is used to place an order. The PO becomes a contract as soon as a vendor accepts it.
b. What Is an Invoice?
When an order is completed, a vendor will send an invoice to its customers as a formal request for payment. It contains the amount of money owed and a list of the provided products or services.
2. Why Is It Important?
A purchase order or an invoice may seem like an extra burden. Still, when the need for purchases rises, and the buyer-seller relationship develops, these financial records assist a firm in managing its purchases efficiently. You can’t just prefer one when it comes to choosing between a purchase order and an invoice since both are equally important:
a. Importance of Purchase Order
Purchase order helps organizations to conduct smooth business deals by:
- Conveying Clear Expectations: You may communicate your needs and requirements to your vendors upfront via purchase order. It helps you set clear expectations and specify what exactly is required.
- Eliminating Duplicate Requests: The POs assist in keeping track of who ordered what, from whom, and when as the volume of order requests rises. Without a purchase order, you risk making duplicate requests that cost your company money.
- Effectively Managing Inventory: Typically, businesses lack a clear understanding of their inventory, which results in issues like shortages. A purchase order system lets you decide how much stock to maintain and when to restock. You can manage your inventory more effectively by adopting software to handle your POs.
- Making Budgeting Easy: You must determine order quantities and costs before the project starts to issue precise POs for a big project. With POs in hand, you can easily make flexible budgets that provide you with a complete overview of your project’s finances.
b. Importance of Invoices
Invoices are the receipt you get from a supplier asking for payment for their services. It is essential because it:
- Establishes a Trail of Evidence – It creates a paper trail between the customer and the seller. Sending, receiving, and paying invoices indicate that two parties are in communication, and the itemized form of an invoice keeps your business interactions open and honest.
- Keeps Everyone on Board – Each invoice maintains a current tally of account balances. Business owners keep track of their expenditures using invoices, and finance teams can monitor where the money is being spent and how much is being spent.
- Makes Taxation Easier – Keeping track of your invoices can safeguard you and your company from external and internal allegations and make auditing and calculating taxes simpler.
3. Who Is the Sender, When Is It Sent, and Where Do They Fall Into the Procurement Workflow?
Two of the most confounding financial terminology are purchase orders and invoices, which sometimes appear synonyms. Both are statements regarding products and services that are tied to trade. However, they happen at different stages of a procurement workflow.
The buyer sends a purchase order at the start of a commercial transaction. This document outlines the client’s requirements for the goods or services, including the quantity and cost. The supplier is then asked to approve the purchase order. Once accepted, the purchase order becomes a contract that must be followed.
The supplier issues an invoice when the purchase order’s conditions are satisfied. In this case, the seller is the sender. The sum that was previously agreed upon is listed on an invoice, and the customer is required to pay it when the transaction is fulfilled. Additionally, it can include the seller’s available payment options, such as cheques and electronic payments.
An invoice includes the initial purchase order number for reference. This will verify that the purchase was previously budgeted for and authorized to the buyer’s finance team and, in turn, helps accelerate the supplier’s payment.
4. What Do They Consist Of?
Purchase orders and invoices have many similarities when it comes to their constituents, but they also differentiate themselves through what they consist of.
a. Purchase Order
It is necessary to provide the following details on a purchase order:
- Name and contact information for the buyer
- Name and contact information for the seller
- Purchase Order Number
- Date of Issuance
- Describe the products or services you’re looking for
- The volume of the desired products or services
- The date that the products or services are delivered
- Any unique details, such as requirements or shipping instructions
- Information on taxes
- Signature of both buyer and seller
b. Invoice
The invoice has to contain the following items:
- Name and contact information for the seller
- Name and contact information for the buyer
- Purchase Order Number and Invoice Number
- Date of Issuance
- A precise breakdown of the goods or services bought
- The number of each item bought
- The price per unit of each item
- The whole cost of the services
- The date of the transaction
- Signature of seller
5. Signing
To be a legal document, both the purchase order and invoice must be signed by the parties. While the buyer and seller typically sign a purchase order, an invoice is generally signed by the seller only.
a. Purchase Order
The purchase order is signed by both parties to ensure they authorize the order placed by the buyer. It additionally double-checks the requirements written in the purchase order. It acknowledges the order, quantity, and feature before it gets accepted by the seller, and they start working on it.
Similarly, the seller signs the purchase order because it confirms that the seller has understood the order’s requirement and agrees to deliver the goods on the date mentioned on the purchase order.
b. Invoice
An invoice must be signed by the seller only. It is sent once the buyer has received the goods. Buyers do not need to sign the invoice because once it is issued, it will be kept with the buyer for record purposes. Once the buyer pays the invoice, the seller might have to sign the acknowledgment of receipt to confirm the buyer has paid the payment.
6. Payment
POs and invoices are formal business papers for your company since they include legally enforceable agreements. As a result, once either shipped or received, the products or services must be prepared and paid for under the agreed-upon arrangement between the parties.
a. Purchase Order
In the case of a purchase order, it does not guarantee payment. Once the suppliers are accepted, goods or services mentioned in the purchase order should be delivered within time, or else as per the terms and conditions, the supplier may be liable for a penalty.
b. Invoice
An invoice guarantees payment for the goods or services listed. When the supplier issues an invoice, they expect to be paid as the invoice is a payment request. To ensure the buyer pays the seller on time, the supplier’s additional terms and conditions to the invoice penalize the buyer in case of late payment.
Endnote
Purchase orders and invoices are an essential part of the financial documentation of every organization. They help you keep track of your order, inventory, and organizational spend. While some businesses still work with these documents manually and on paper, new trends are now transforming these traditional methods.
With robust software, businesses worldwide are digitizing their procurement workflows, including purchase orders and invoices. Purchase order and invoice approval software systems further assist companies in monitoring and managing their orders, inventories and payments.
Prasanna Rajendran is the Vice President at Kissflow, where he heads the business operations of Kissflow Procurement Cloud, a flexible purchasing software for procurement teams to streamline all their purchasing processes in a single place. He has over 20 years of experience in technology and has helped Fortune 500 companies with custom solutions in the sourcing and procurement space.
