Purchase order vs. invoice: What’s the difference?

As a new business owner, there’s a lot to learn – particularly surrounding financial management. One of the things you need to know is the difference between a purchase order and an invoice.

A purchase order is sent by the buyer to the vendor to track and manage the purchasing process. An invoice is sent by the vendor to the buyer to request payment for the goods or services provided by the vendor.

Despite their differences, however, purchase orders and invoices also have their similarities. We’re here to help you understand both.

In this article, we’ll cover purchase orders vs invoices – what they are, their differences and similarities and why both are important for your business.

What is a purchase order?

A purchase order (PO) is the official document issued by a buyer to a vendor with the purpose of tracking and managing the purchasing process. Once the vendor accepts the PO agreement, it becomes a legally binding contract.

A purchase order typically contains the following information:

• PO number
• Date of purchase
• Buyer details
• Vendor details
• Order details
• Payment terms
• Buyer name and address
• Vendor name and address
• Delivery details
• Special instructions, if applicable
• Signature of the issuer

Purchase orders can be used to make stand-alone purchases. However, a buyer can also use a standing purchase order to make recurring purchases. With a standing PO, the buyer can order the same goods or services many times with the same PO number over or within a specific time frame.

Why are purchase orders important?

There are many reasons why you’ll want to use purchase orders for order placement – regardless of the size of your company.

Here are some key reasons why purchase orders are important:

• Legal protection: A PO serves as a legally binding contract between the buyer and the vendor. Should disputes or disagreements arise, the PO clearly states the agreed-upon terms and helps to resolve the issue more efficiently.
• Clarity and transparency: POs specify the products or services purchased and provide both parties with a clear understanding of their responsibilities. This ensures clarity and transparency throughout the transaction.
• Financial control: POs track committed expenditures against actual spending, helping companies manage their budgets. They also help companies keep track of their purchase history for auditing and reporting purposes.
• Inventory management: POs help in planning and maintaining inventory levels, ensuring that stock is always available when needed.
• Professional relationships: Issuing formal POs demonstrates professionalism, helping to foster trust between buyers and vendors.

What is an invoice?

An invoice is an official payment request sent by the vendor to the buyer once an order is fulfilled.

An invoice typically contains the following information information:

• Invoice date
• Invoice number
• PO number
• Vendor details
• Buyer details
• Description of goods or services
• Agreed unit price
• Payment terms
• Taxes, if applicable
• Discounts, if applicable
• Total amount due
• Invoice due date
• Signature of the seller

Vendors may issue recurring invoices when the buyer is obligated to make multiple payments – for example for monthly software subscription payments.

Why are invoices important?

There are many reasons why invoices are an essential element of financial management for both buyers and vendors.

Here are some key reasons why invoices are important:

• Legal documentation: An invoice serves as a formal record of the sale. It provides proof of transaction and ensures compliance with tax regulations and other legal requirements.
• Cash flow management: By specifying payment terms, invoices help manage cash flow and ensure that payments are received in a timely manner.
• Revenue tracking: Invoices help businesses track their revenue, allowing for accurate financial reporting and analysis.
• Professionalism: Issuing formal invoices demonstrates professionalism. Invoices also provide clear and detailed information about the goods and services provided, pricing and payment terms, reducing the likelihood of misunderstandings.
• Professional relationships: Invoices ensure transparency in transactions. This helps build trust between buyers and vendors and provides clear evidence of the agreed-upon terms, helping to resolve disputes efficiently.

Differences between purchase orders and invoices

The primary difference between a purchase order and an invoice is that a PO is sent by the buyer to the vendor to track and control the purchasing process, whereas an invoice is sent by the vendor to the buyer to officially request payment once the order has been fulfilled.

Below, we’ve highlighted some of the other key differences between POs and invoices:

Similarities between purchase orders and invoices

Despite their differences, both purchase orders and invoices are commercial documents concerning the purchase of goods and services – and this means they share quite a few similarities.

They both:

• Include basic order details, vendor and buyer information and payment terms
• Play an integral role in spend management and optimisation
• Provide greater transparency in the purchasing process
• Serve as legally binding documents between buyers and vendors

With their similarities, it’s easy to see why many get the two confused. The key difference to keep in mind is that the PO is sent by the buyer to the vendor as confirmation upon placing the order, whereas the invoice is sent by the vendor to the buyer to request payment after the order is fulfilled.

Why do companies need both purchase orders and invoices?

Both purchase orders and invoices are used to establish budgeting, spending and internal control over the purchasing of goods and services. They’re used for tracking and approval and to ensure adherence to company policies.

When it comes down to it, it’s not a choice between purchase orders vs invoices: you can’t simply pick one.

Both documents are vital for establishing and maintaining good purchasing and financial management. They’re both important for legal protection and documentation, and they both help to create transparency in communication and eliminate mistakes.

This makes both purchase orders and invoices essential for businesses seeking to manage their purchases smoothly.