Invoice Vs. Purchase Order: Key Differences That Matter

January 15, 2024

This blog post discusses the key differences between an invoice and purchase order, including their roles and impact on cash flow. It provides a comprehensive guide to understanding the two terms and their significance for businesses.

James Fyfe
Co-founder - CEO

Invoice Vs. Purchase Order: Key Differences That Matter

Understanding financial documentation and processes is paramount in today's competitive business world.

Knowing the differences between a purchase order and an invoice is crucial for buyers and sellers, enabling effective inventory management, accurate payment processes, and promoting healthy cash flow.

In this article, we'll delve into the key differences between purchase orders and invoices, two essential documents in the business transaction process.

In-depth Look at Invoice Vs. Purchase Order

What is a Purchase Order?

A purchase order (PO) is an official document or request from a buyer to a seller authorizing the purchase of goods or services at specific prices and order quantities. The PO typically includes the order details, such as shipping and billing addresses, PO number, and expected delivery dates.

What is an Invoice?

Portant's Google Sheets Invoice Template

An invoice is a legally binding document a seller sends to a buyer requesting payment for goods or services provided.

When writing invoices, you must include an invoice number, payment terms, the goods or services sold' quantity and price, and the purchase order number (when applicable).

Roles of Purchase Orders and Invoices in Business Transactions

Both purchase orders and invoices play crucial roles in business transactions. While purchase orders initiate the purchasing process, ensuring clear communication between the buyer and seller via separate contracts, invoices request payment once goods or services are delivered.

Understanding the Purchasing Process

Procurement Process and Purchase Orders

The procurement process begins with creating a purchase order form, which the purchasing department sends as an official request to the supplier. 

This document outlines the buyer's specifications, expected delivery date, payment schedule, and any additional terms, effectively solidifying the buyer-seller relationship.

Payment Process and Invoices

Girl Processing a Purchase Order

Once the goods or services are delivered, the seller issues an invoice with the necessary information for the buyer to verify, including the PO number and shipping address (if applicable). Payment is processed according to the agreed-upon terms, and both parties can review the transaction through their accounts payable and accounts receivable departments.

Inventory Management and Purchase Order Systems

A Man Managing the Inventory

Efficient inventory management systems often utilize digital purchase orders to streamline the purchasing process, reducing human error and ensuring seamless communication from purchasing to delivery. This also allows for accurate tracking of outstanding invoices and staying informed about the company's expenses and accounts receivable turnover ratio.

How Purchase Orders and Invoices Affect Cash Flow

Accounts Receivable and Sales Invoices

Effective accounts receivable management and timely sales invoice processing are essential for maintaining healthy cash flow. Proper tracking of sales invoices helps small business owners identify and address any discrepancies or late payments directly impacting their financial stability.

Accounts Payable and Purchase Invoices

Purchase invoices, which are a type of vendor invoice, affect a small business owner's accounts payable. Managing purchase invoices and adhering to the agreed-upon payment schedules is vital to nurturing a strong relationship with suppliers and maintaining a healthy cash flow within the business.

Payment Schedules and the Effect on Cash Flow

Both buyers and sellers must abide by established payment schedules to maintain a stable cash flow. Late payments on outstanding invoices or not sticking to the agreed-upon financial terms may lead to strained relationships or additional fees, ultimately impacting the financial health of both businesses.

Key Differences Between Purchase Orders and Invoices

Legally Binding Contracts

Example of a Legally Binding Contract

One key difference between Purchase Orders and Invoices is that while a purchase order acts as an official request in the purchasing process, an invoice generally serves as a legally binding contract to pay for provided goods or services.

Expected Delivery Dates vs. Payment Terms

Expected delivery dates refer to the timeline for receiving the goods or services as specified in a purchase order. Payment terms define the allowed period for rendering payment for the invoice, often set in "net" terms; e.g., "Net 30" indicates that payment for the purchase invoice is due within 30 days of the invoice date.

Purchasing Department vs. Accounts Receivable

The purchasing department manages the purchase order process, while the finance and accounts receivable departments handle the invoicing and receipt of payments. 

These separate roles help maintain an organized, transparent financial workflow for buyers and sellers.

Request Payment: Ensuring Proper Payment with Both the Buyer and Seller

Invoice Number and Purchase Order Number

Invoice numbers and purchase order numbers are unique identifiers for individual transactions, facilitating accurate record-keeping and prompt payment processing. Invoices often include the billing address and corresponding PO number to ensure accuracy and avoid misunderstandings between parties.

Delivery Date and Services Delivered

Recording delivery dates and the specific services delivered within invoices serves as an important reference for both buyer and seller. Details of delivery method and services provided allow both parties to verify the transaction, monitoring performance and compliance as per the purchase order's terms and conditions.

Official Documents and Their Importance in the Payment Process

Both purchase orders and invoices are official documents in the payment process, ensuring clarity and accountability. Proper management of these financial documents is vital to maintaining a smooth transaction process and a healthy cash flow for buyers and sellers.

Why Issuing Both Invoices and Purchase Orders Is Crucial:

Creating a Healthy Turnover Ratio

One of the most important financial metrics for any business is the turnover ratio, which measures how quickly a business can convert its assets into revenue. By issuing both invoices and purchase orders, businesses can improve their turnover ratio by ensuring that goods or services are delivered promptly and that invoice purchase orders and payments are received on time. This helps businesses maintain a healthy cash flow and reinvest in their operations, leading to growth and profitability.

Ensuring an Effective Purchasing Process

By issuing purchase orders, businesses can ensure that there is a clear and efficient purchasing process in place. A purchase order provides a record of the goods or services ordered, the agreed-upon prices, and the delivery date. This buying process helps businesses avoid misunderstandings and disputes with suppliers and ensures that the correct goods or services are delivered on time.

Separating Stock and Outstanding Payments

Issuing both invoices and purchase orders also helps businesses separate stock and outstanding payments. This is particularly important for businesses that offer credit to their customers, as it helps them track the payments owed and the stock they have on hand. 

By keeping these two aspects of their business separate, businesses can avoid confusion and ensure they have enough stock to fulfill their orders.

Preventing Duplicate Orders and Payments

Finally, issuing both invoices and purchase orders helps businesses prevent duplicate orders and payments.

By reconciling these two documents, businesses can avoid ordering the same goods or services twice and prevent duplicate payments, which can be costly and time-consuming to correct.

Automate Your Invoicing Process After Receiving Purchase Orders Using Portant's Technology

As a business owner, you know how time-consuming it can be to create and send invoices manually after the buyer initiates a purchase order. 

Fortunately, with Portant, you can automate your invoicing process after a purchase order has been made, saving you time and effort.

Once a purchase order has been initiated by the buyer, with Portant Google Sheets invoice template you can dynamically generate an invoice based on the order details. This means that you no longer have to spend time manually creating and sending invoices, reducing the risk of errors and improving your efficiency.

This helps you make informed decisions about your business and ensure you are getting paid on time while focusing on other aspects of your business.

Create a free account on Portant's portal and start saving your business time and money!

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