Purchase order vs invoices: What’s the difference?
Purchase orders and invoices are documents that contain details of your financial business activity. More specifically, they indicate whether your transactions are purchases or sales.
While they share some similarities, such as order details, price, vendor information, shipping details, and general information on a transaction, purchase orders and invoices are intrinsically different documents.
A purchase order (PO) is issued by the buyer to the seller and outlines the client’s expectations in terms of the product or service they plan to buy as well as the quantity. An invoice, on the other hand, is issued by the seller to the buyer after the terms of a purchase order have been carried out. It includes the financial terms that were laid out in the PO as well as options for payment.
Understanding the purpose and nuances of these two important documents helps you remain compliant and organised when it comes to your business’s financial endeavours. They also allow you to maintain a healthy cash flow, something critical to ensuring your business is in a good place to handle any financial emergencies.
In this article, we’ll help you understand what purchase orders and invoices are, how they differ, and why they’re important to your business.
Table of contents
- What is a purchase order?
- Why is a purchase order important?
- What is a PO number?
- What is an invoice?
- Why are invoices important?
- Differences between purchase orders and invoices
- Similarities between purchase orders and invoices
- Why do companies need both documents?
- Issuing purchase orders and invoices
- Expert insights
- Wrapping Up
What is a purchase order?
A purchase order (PO) is a document a buyer sends to a seller after ordering goods or services. POs outline what the order should contain, the date of delivery and price.
Some POs also include prerequisites that both the buyer and seller have agreed to before the purchase. These could be anything from receiving a certain quantity of good or items by airfreight to using an alternative payment method for ordering.
After the seller accepts the purchase order agreement, the document becomes a legally binding contract.
Buyers can also use standing purchase orders to facilitate recurring purchases. A standing PO allows them to order the same items or services many times over or within a certain time frame with the same PO number.
Alternatively, the ordering party can draw up a blanket purchase order to get multiple deliveries for a set price, over a set period. Blanket POs are typically used in B2B purchases and may include discounts or other incentives.
A basic PO usually includes the following information:
- Date of purchase
- PO number
- Order description
- Unit price
- Delivery date
- Buyer name and address of the buyer (shipping address)
- Vendor name and address of the seller (billing address)
- Terms and conditions
- Signature of the issuer
Some business owners confuse purchase orders with purchase requisitions. However, there is a notable difference between the two documents.
Employees in large companies use purchase requisitions to place orders with the purchasing department. The purchasing department then sources the required goods from an outside vendor or merchant. This means that the order is processed internally by those in charge of procurement.
Requisition orders are common in larger companies with various departments but rarely used in small business.
Why is a purchase order important?
Whether you’re a small business or a large company, there are many reasons why you would want to use POs for order placement. A purchase order allows you to:
- Set clear expectations. A purchase order allows you to clarify your requirements to your vendors. This ensures that expectations are clear from day one.
- Avoid duplicate requests. When the order request volume increases, POs help to keep track of who ordered what, from whom and when. Without a purchase order, you can end up making duplicate requests and causing a loss to your business.
- Prevent cost overruns. With a PO on hand, you can check the pricing agreement you had with a specific supplier. If that supplier decides to increase the price, you can use the purchase order to clarify the initial cost.
- Detect performance issues. An analysis of your POs can give you clues about which orders are contributing towards your growth and which ones are increasing costs without offering any value. With such insights, you’re more likely to be strategic with your purchases.
- Manage inventory effectively. If you’re using software to manage your POs, then you can better manage your inventory. Companies usually don’t have clear inventory visibility which causes problems like inventory stockouts. A purchase order system will help you determine how much stock you should keep and when it’s time to replenish, effectively helping you to streamline your operation and enhance your inventory management.
- Improve budgeting. To issue accurate POs for a large project, you’ll need to calculate order quantities and costs before the project commences. This should give you a better idea of how to budget for such projects.
What is a purchase order (PO) number?
A purchase order (PO) number is a unique reference number assigned to a purchase order. It helps ensure the seller ships the same goods that the buyer is expecting to receive.
Additionally, the purchase order number makes it easier to match invoices to purchase orders. Mentioning the number on invoices helps the seller charge the right amount for the goods. The buyer can also match the reference number on the invoice to their PO number to ensure they’re paying for the right order.
What is an invoice?
An invoice is a document created by the seller or supplier of goods as a way to keep track of and solicit payments.
Sellers send out invoices after the terms of a purchase order have been met, whether that be through a finished physical product or a completed service.
Say, for example, you are a cereal supplier and you get a PO for two hundred additional boxes of cereal from a local grocery store. When you send them the goods, you will include an invoice that details the number of products, the price per product and the payment terms.
Regardless of whether your company supplies goods, services, or a mixture of both, a basic invoice usually includes the following information:
- Invoice date
- Invoice number
- PO number
- Item or service descriptions
- Agreed unit price
- Terms of payment
- Discounts (if applicable)
- Taxes (if applicable)
- Total amount due
- Invoice due date
- Acceptable methods of payment
- Business name and contact of the seller and buyer
- Signature of the seller
Top Tip: If your business is VAT registered, you are required to issue VAT invoices. You’ll need to provide your VAT registration number alongside general invoice information. To find out more, read our full guide to what information you must include on your VAT invoice 🌟
Invoices provide a way for you to keep track of your revenue, whether it be through cash basis accounting or accrual basis accounting.
Under cash basis accounting, when cash is received (e.g. an invoice is paid), then revenue is recognised.
In accrual basis accounting, your sales represent revenue that has been earned. Revenue is then listed on the top of the income statement.
Both methods of accounting have their positives and negatives, but the invoice plays a vital role in how your company determines when you record expenses and revenue.
Top Tip: Understanding the basics of small business accounting will help you to make more informed financial decisions for your business. Specifically, it’s helpful to understand these two accounting methods, the three main financial statements, and the difference between an accountant and a bookkeeper. To learn more, read our complete guide to accounting for startups 📚
What is a purchase invoice?
While the term is not commonly used, a purchase invoice is essentially the same as a sales invoice.
A purchase invoice is created after the buyer has presented the seller with a purchase order, and the order has been confirmed and fulfilled by the seller. It contains identical information to a regular invoice as well as a due date, by which the buyer commits to pay the seller.
“The concept of a Purchase Invoice, refers to a document in the eyes of the purchaser that details what the seller is billing the buyer for. On the invoice, you can expect to find a breakdown of what has been purchased, how much each item costs and how much the seller is due to be paid in total.” – Dan Hogan, founder and COO, Ember
What is a sales invoice?
A sales invoice is almost identical to a purchase invoice, however, it is issued by the seller to the purchaser upon delivery of goods and services.
The purpose of a sales invoice is to outline the goods and services provided, the quantity of each and business terms such as delivery method and payment due date. This document is legally binding and serves as a request for payment.
Here’s what a final sales invoice looks like:
Top Tip: Invoices are a crucial part of any business, as they provide cash flow transparency and act as proof of completion upon delivery of goods and services. For more information on creating your first invoice, read our in-depth guide to what an invoice is and how to raise them and get paid 💡
Why are invoices important?
At its most basic, an invoice is a document that gets you paid, but there are other important aspects to it. For instance, invoices allow you to:
Create a paper trail
One of the invoice’s key purposes is to create a paper trail between the buyer and the seller. Sending, receiving and settling invoices proves that both parties are communicating, while an invoice’s itemised nature keeps your business dealings transparent.
Help everyone stay on track
As a small business owner, you’re busy, your clients are busy, and your suppliers are busy. Invoices are a necessary way to keep everyone on track with payments. Each invoice shows the itemised goods or services for the most recent deliveries, but it also keeps a running total of account balances, should you or your customer be on a payment plan.
“Invoices can help companies keep track of what they’re spending their money on. Not only will they see how much is going out with each purchase, but finance teams will also be able to keep track of where the money is being spent, and potentially figure out ways to cut back on spending.” Dan Hogan, founder and COO, Ember
Simplify tax season
Who doesn’t want tax season to run a little more smoothly? Staying on top of your invoices protects you and your company, and it makes everything easier to audit and reconcile when the time comes.
Top Tip: If you’re a UK business owner, there are a number of business taxes you may be liable to pay. For a full breakdown of the different types of tax, which ones apply to your business and how to pay them, check out our simple guide to small business tax 🔢
Speed up payment and processing
You may be tempted to include the bare minimum in your invoices as a way to save time, but resist that urge. The more information you include, the fewer questions your clients will have, which can speed up the payment process.
Aid accounts receivable
Creating invoices is also essential because it is the record of your accounts receivable (all of the money due for goods or services that have been delivered but not yet paid for). Not only is this important for your balance sheet as an accounting document, it also helps outside investors understand how quickly your company is receiving the funds from outstanding invoices. By analysing the accounts receivable turnover ratio, investors can see how efficient your company is at collecting cash that is owed to it.
Top Tip: To learn more about why accounts receivable is an important part of keeping track of late payments (thus boosting your cash flow), read our guide to what is accounts receivable (and how to manage it) 🔍
Reinforce brand identity
If you’re using an invoicing software or app, you should be able to personalise the content and appearance of your invoices. Personalisation helps to reinforce brand identity and also enhances the customer’s perception of your business. We’ll discuss invoicing software in more detail shortly.
Differences between purchase orders and invoices
The key difference between the two documents is the objective or goal.
When you issue a purchase order, you are requesting for your suppliers to deliver the goods. When you issue an invoice, you are requesting customers to make payment. Hence:
- A PO’s goal is to ensure the fulfilment of orders
- An invoice aims to collect payment for products or services sold
Another difference is timing:
- A purchase order is usually sent at the beginning of the transaction to form a contract between parties
- Invoices, on the other hand, are sent at the end of the transaction using the information from the purchase order to request payment
Lastly, a purchase order contains different information than an invoice:
- POs include a detailed description of the order, the agreed price and the ETA for the delivery
- In contrast, an invoice lists the terms of payment, applicable discounts and total amount due
|Objective||Confirm the order||Request payment for the order|
|When it is sent||Upon placing an order||After the order is fulfilled|
|Details||Order description, agreed price, delivery time, etc.||Terms of payment, applicable discounts, total amount due, etc.|
Similarities between purchase orders and invoices
Purchase orders and invoices also share similarities. For instance, much of the time, both the PO and the invoice are referencing the same good or service. Plus, both documents list information regarding the buyer and the seller, including business names, contact information and mailing addresses.
Most significantly, both POs and invoices are legally binding agreements. That means that once either one is sent and received, that good or service needs to be prepared and paid for according to the previously determined agreement between parties.
Why do companies need both documents?
Simply put, your company may use both documents at one point or another because the nature of business requires you to order as well as provide.
Even if your company mostly provides goods or services (and therefore you mostly send out invoices), there may come a time when you need to purchase something, and a purchase order will help you keep track of those expenses.
Issuing purchase orders and invoices
Purchase orders and invoices are not difficult to understand and use. However, manually creating tons of such documents is often time-consuming and error-prone, even if you are using an invoice template.
Moreover, manual records have the potential to get disorganised, or worse, disappear, causing problems in disputes or at audit time.
Fortunately, digital PO and invoicing let you do away with tedious, paper-based processes.
You won’t have to worry about things like paper, envelopes, ink, and stamps. You also won’t need to generate a photocopy of the document, which can get expensive if you’re issuing multiple POs and invoices every day. Using a digital solution is more cost-effective, secure and easy.
There are many invoicing software solutions available on the market. To ensure you pick the right one for your business, make sure it does exactly what you need. For example, automated payment reminders, recurring billing, reporting, payment options, activity tracking and more.
At Tide, we also have our own invoicing solution that’s free, easy to use, and customisable.
For example with Tide’s free invoicing you can invoice directly from within the app, generate templates, make use of preset VAT rates to automatically calculate and add VAT, and you’ll receive notifications as soon as you’ve been paid.
And with our Invoice Assistant, you’ll be able to automate invoice matching and smart invoice chasing. For extra peace of mind, you can also use Tide Invoice Insurance, and we make sure you’ll get paid even if your customer can’t pay you. All you need to get started is to sign up for our free business bank account.
We also have several accounting integrations that make it easy to pull in your business transactions from your preferred accounting software and reconcile them within our system on a daily basis.
One of the best ways to stay organised and efficient is to manage your business finances through either a desktop or mobile app.
How do purchase orders help finance teams stay organised and within budget?
A purchase order is a document sent from a buyer to a seller that indicates the types, quantities and agreed prices for the products or services they intend to purchase.
The main purpose of this is to help finance teams understand and keep track of what different departments have been purchasing across the business.
You can think of a purchase order as an instruction. Within companies, specific teams have set budgets, and purchase orders are used to put together a list of what the team is looking to spend on a particular product (for example, hats). When the purchase order is given to a seller, it gives the seller instructions on what they’re looking to buy, a transaction that can be translated as “this is within the allocated company budget.”
When delivering on a purchase (for example, the team has requested £100 worth of hats and the seller is handing over the hats), the seller will return the items with an invoice containing the purchase order number (PO number) to the buyer—otherwise known as a ‘purchase invoice’ or a ‘supplier invoice’—that highlights how much the company owes to the seller for their goods or services. Before the invoice is paid, the finance team must be given both the purchase order (normally from the internal team placing the order) and the purchase invoice (from the seller), which will be matched up to verify that the final order matches what was pre-approved.
Purchase orders assist the ‘Accounts Payable function’—an arm of a larger finance team—of bigger companies streamline the buying process and help control spending limits for different departments across the organisation.
Why is a PO number important to include?
This is the number that goes on both the purchase order and the supplier invoice to match the two documents. This ensures that the purchase intention (the number and type of hats the team intended to buy) matches what the seller has billed the purchaser for.
This helps the finance team and department heads keep on top of expenditure, making sure that all outgoings are within the team budget, as well as explaining any particularly large purchases.
Are purchase orders still relevant today?
Purchase orders are still used by larger companies but are on the way out mainly because of the administrative burden they carry. There’s a lot of paperwork to keep an eye on—especially if purchase orders are being issued by multiple teams on a regular basis.
As a result, there are an increasing number of alternatives being implemented to curb departmental spending and to better keep track of expenditure (rather than sending out multiple purchase orders for the sake of it).
Issuing company cards with spending limits on them is one popular way for companies to manage spending. This means that spending can be tracked both automatically and digitally, verifying where the money is being spent while making sure that departments and employees are not overspending.
What are the differences and similarities between invoices and purchase orders?
If the sale is carried out correctly, the contents of the documents should be identical. Both documents will outline what the buyer has requested from the seller (purchase order), and in turn what the seller has delivered and is expecting payment for (purchase invoice).
If there is a mismatch between the two documents, it could suggest that the seller has not delivered what was on the original purchase order, that they have over-billed or under-billed the buyer, or that an admin error has occurred.
Both documents are required to:
- Verify what the buyer has requested;
- Ensure that the request falls within the buyer’s allocated budget, and;
- Determine that the seller has delivered what was requested on the initial purchase order.
Once the two documents are matched up and the finance team can confirm that the requested order is both correct and within budget, they can pay the seller and deduct the amount spent from the team budget.
Purchase orders and invoices are beneficial for small businesses. They help you maintain accurate, detailed records of purchases and sales for financial statements.
You can implement paper-based POs and invoice processing in your business, or you can use a digital solution. Going digital makes it easier to issue and refer to these documents when required.
While a standalone solution may be right for some businesses, you may benefit from a multifunctional finance platform such as Tide to take care of all your needs in one place.
Take the hassle out of business finance. Get paid faster with Tide Invoicing 💸
Send invoices directly through the Tide app – it’s free, quick, and customisable. This means you don’t need separate software. Instead, you can keep track of your invoices and payments in one place, whenever and wherever you’re online. Get started with Tide Invoicing today! 🚀
Photo by Andrea Piacquadio, published on Pexels