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The difference between a Purchase Order and an Invoice

Thursday, July 18, 2019

What is a Purchase Order and how it is different from an Invoice ?

While starting out your own new business venture can be really exciting, it can be nerve-wrenching too at the same time. Unfamiliarity with new business terms can cause hindrance in understanding and communicating with clients. Especially, when related to the sale of physical goods, you need to catch up fast with the inside business terms. Very early you will come across two seemingly familiar terms: purchase order and invoice.

Purchase order and invoice are two mostly confusing financial terms and they can often seem like synonyms. Both, purchase order and invoice are your commercial communication about goods and services. But their time of occurrence is different. Although they are quite similar, they have a few differences which must be understood clearly.

What is a Purchase Order?

The purchase order is a document indicating types, a number of products and services to be purchased. It details the items to be purchased for a certain price. It also includes the payment terms, shipment, other associated terms, and conditions. The customer sometimes creates a standing PO. The standing or blanket PO allows a company to order the same product multiple times using the same PO number over an extended purchase period.

Purchase Order basics include:
  • Issue date of a purchase order
  • Client’s information
  • Supplier’s information
  • Purchase order number
  • A detailed list of goods and services ordered
  • Terms and conditions

Importance of a Purchase Order: A Purchase Order is typically used when a buyer wants to purchase supplies or inventory on account. It is important as you and your team have instant visibility of incoming stock; how much is coming and when is it due to turn up. A properly managed Purchase Order system will quickly tell you what’s been ordered, shipped and received but not invoiced and so on. Besides that, creating Purchase Orders in the system will help prevent ordering more of an item than you may need. You can also match the delivered goods against what was ordered, to prevent wrong delivery. Suppliers use Purchase Order’s to fulfill their orders and payment processing. Online invoicing software makes it easy to send purchase orders to vendors online, in pre-designed templates.

What it an Invoice?

Invoice is a document issued by a seller to a buyer indicating items sold, prices, date of shipment, delivery and payment terms. It is also called a “bill”, “statement” or “sales invoice”. The term invoice indicates money the buyer owes to a seller. The invoice is also specified with the period of time after which the buyer has to make payment to the seller for the goods and services they have purchased. Modern-day invoices are transmitted online.

Importance of An Invoice: Invoices are a great way to track your earnings, business, and expenses. It gives you the view of the sale of products for inventory management and to calculate the amount of profit made. If invoices are utilized properly, they may act as documentation for all your business transactions. Invoice reports help you to show which orders are completed and paid for and total outstanding for the customers. Besides that, you have complete financial control of your business and ongoing progress.

Why does a company need Purchase orders?

  • To set clear business expectations
  • Purchase Orders are clear documents that tell your vendors about your specific orders details. It is beneficial for both the parties in order to cross-check and refer to, while in need.
  • It helps the business manage orders
  • Purchase orders are official documents that help various other teams in the house about the incoming or yet to be received deliveries. It helps managing operations effectively and avoids delivery confusions.
  • It helps in managing business budgets
  • Once a company creates a purchase order, it can help it factor its costs and therefore, manage budgets.

Why does a company need an invoice?

It is an enabler for businesses to receive money: Sellers are only bound to receive money once they send an invoice. Companies do not release payments until and unless they receive an official invoice from the seller. Any call or email would never be able to suffice it.

Invoices update incoming payments: As a seller or supplier, you need to know the amount of money you’ll be receiving for the services offered. It will help you track your payments and have a clear picture of returns on your investments.

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