Invoice Vs. A Purchase Order: Everything You Need To Know

Defining what a purchase order is and what an invoice is might be confusing to those who are new to the procurement process. Even the most seasoned team members could confuse the terms.

Failure to catch up on these procurement tears could lead you to miss important financial documents. Understanding the purpose of these two important documents helps you remain compliant regarding your business's financial endeavors and maintain a healthy cash flow.

At PeerDive, our experts have put together this fantastic guide on everything you need to know about the differences between an invoice and a purchase order.

What Is A Purchase Order

A purchase order, also known as a PO, is an official document sent by the buyer to the seller to start the transaction process. A purchase order outline what the order should contain, delivery, dates, pricing, and more. Some purchase orders may include prerequisite details that the buyer and sellers have agreed upon before the purchase can be made.

After the seller accepts the purchase order, it will become a legally binding agreement. Think of it as a contract. Both entities can use a purchase order to track and manage the procurement process. For example, employees will use a purchase order to place orders within a procurement department. The purchasing department will then source the required goods needed.

A basic purchase order will usually include the following information:

Date of purchase
Assigned PO number
Order description
Unit price
Delivery date
Delivery address
Buyer information: name and shipping address of the buyer
Vendor information: name and shipping address of the buyer
Terms and conditions
Payment terms

Why Do Businesses Use A Purchase Order

Whether you are a small business or a large corporation, using a purchase order during the buying process can ensure that you are setting clear expectations from the beginning by both parties. Some additional uses of a purchase order will include:

Setting Clear Exceptions:

Using a purchase order will allow you to clarify your requirements from vendors from the beginning. This ensures that everything runs smoothly for the buyer and seller when the order is placed into production.

Avoid Creating A Duplicate Order:

Purchase orders can help track who ordered what and what they did. Without a purchase order, you can accidentally create a duplicate request.

Prevent Changes In Pricing:

With a PO, you can always check the pricing agreement with a specific supplier. If that supplier wants to increase their pricing, you can always refer to your PO, your legally binding contract.

Budgeting:

A PO can effectively check order quantities and their costs before a project commences. The PO can be a tool for you to plan out your budgeting effectively.

How Does A Purchase Order Work

To use an example to explain a purchase order, let’s say you are a grocery store that needs to restock a few items from its baking goods aisle (flour, sugar, etc.). The grocery store would reach out to their suppliers and submit a purchase order for the items and the quantity they need for each item. The supplier would then check their stock levels to see if they could fulfill the purchase order.

After the supplier agrees they have the stock needed, they will approve the purchase order. Depending on the payment terms listed in the purchase order, the supplier would send an official invoice using the purchase order details.

What Is A Purchase Order Number

A purchase order number (PON) is a unique number assigned by the buyer or the seller to identify the specific order. A purchase order number is typically composed of numbers and letters unique to the project. The purchase order number should be used as a reference in any communication between suppliers and buyers regarding the order.

The seller will use the purchase order number when it is time to send the official invoice over.

What Is An Invoice

An invoice is an official payment request that a seller sends to a buyer. Depending on the payment terms agreed upon between the buyer and the seller, an invoice might be sent immediately or after the goods are delivered. An invoice will list the products purchased by the buyer and the amount of money owed at the time.

The main purpose of an invoice is to outline what goods and services are being purchased from the buyer. An invoice is a legally binding agreement and will serve as a request for payment.

An invoice will typically contain:

A description of the products/service
Quantity of each item purchased
Payment terms
Vendor details
The unit cost of each item
The total amount of the purchase
Any credits being applied
The date of the purchase

What Are The Main Differences Between A Purchase Order And An Invoice

The main difference between a purchase order and an invoice lies in who sends the document. With a purchase order, the buyer is the one who will send over the purchase order to the seller. With an invoice, the seller will issue the document to the buyer as a request for payment. During the buying process, a purchase order will come before an invoice is requested.

Another main key difference between the two is the main objective. In the purchase order, you request your supplier to deliver the goods. No money is exchanged at this time. With an invoice, you are making a payment request. The goal of a purchase order is to ensure the order can be fulfilled, while an invoice's main objective is to make sure you get paid.

Below is a summary of what information will be on an invoice and what will be on a purchase order:

Purchase Order Contains:

Current date
PO number
Name of the buyer
Name of the seller
Products/services being requested
Detailed information about the product or service
Quantity of products or services
Pricing
Tax information
Expected delivery date
Special notes

Invoice: The supplier will submit to the buyer a request for payment.

Contains:

An invoice number
Credits or discounts
Payment terms
Total amount due
Current date
Name of the buyer
Name of the seller
Products/services being requested
Detailed information about the product or service
Quantity of products or services
Pricing
Tax information
Expected delivery date
Special notes

Are Purchase Orders Still Relevant Today?

Purchase orders are used by larger and smaller companies alike. Although technological changes have eased the administrative border, purchase orders are still relevant to buyers and sellers alike.

A purchase order can be implemented digitally or be paper-based. Although, going digital makes it easier to issue and refer to when necessary.

What To Do If A Client Doesn’t Pay Their Purchase Order?

Have issues with a client not paying their purchase order? PeerDive can help. Peer Dive is a popular online directory created exclusively for businesses to leave and view reviews on individuals before offering their products and or services. Peer Dive was created to help local businesses and their communities make the most informed decision on who they want to do business with.