Do you often find yourself using the terms purchase order and invoice interchangeably?
While these two documents are somewhat similar, a few of their properties make them strikingly different from each other.
In this article, let's understand in detail the differences between purchase orders vs. invoices. You will also understand how you can make the purchase order process at your company more efficient.
What is a Purchase Order?
Purchase orders are formal documents that outline the list of items a buyer intends to purchase from a vendor.
In simpler terms, buyers generate purchase orders for goods or services they need from a supplier. These documents contain the list of items needed, their unit and bulk prices, the expected date of delivery, and the quality standards that the buyer expects.
Purchase orders may also occasionally contain the brand or make of the goods requested. Some other elements that a purchase order carries are listed below:
- Purchase order number
- The date of purchase
- Details of the buyer, including contact details of the POC
- Information and details of the order placed
- Terms of payment
- Address where the delivery is to take place
What is an Invoice?
An invoice is a formal document raised by a vendor toward their buyer requesting the release of payment for the goods and services rendered.
In simpler terms, an invoice is a bill of sorts that a vendor raises to their buyers to summarize the list of items provided for which payment is requested and due.
Raising an invoice essentially communicates that an order that the buyer placed with a vendor has been fulfilled and must now be paid for. An invoice consists of the following details:
- Invoice number
- Information about the vendor, including contact details of the POC
- Discounts, offers, deals, and credit information if availed by the buyer
- Date of the payment or schedule of payment
- Detailed break up of the amount due
- Taxation information
Key Differences Between Purchase Orders and Invoices
Purchase orders and invoices may look like similar documents at first glance. However, there are certain discerning properties in both documents that make them useful in different situations.
Below are the key differences between purchase order vs. invoice:
Issuer and Receiver
- Purchase orders are formal documents that are generated and issued from the buyer's side. The vendor can only request the buyer to raise a purchase order to initiate the supply of goods.
- An invoice is a formal document that is generated by the vendors or suppliers toward the buyers. Before releasing payment, the buyer can request vendors to send the invoice.
Time of Initiation
- A purchase order is initiated once the vendor or supplier is finalized and the terms of the exchange are agreed upon by all the parties involved.
- An invoice is initiated once the goods, as requested in the purchase order, are delivered by the vendor and the order is labeled as “fulfilled.”
- Raising purchase orders helps buyers keep track of items ordered and available in inventory, preventing overstocking.
- Raising invoices helps the vendors keep track of the payments requested, released, and pending, enabling better finance management.
- Purchase orders serve the function of defining the terms of purchase by detailing the benchmarks and standards of the goods requested from a vendor.
- The main function of an invoice is to communicate to the buyer that a vendor has fulfilled one order, and now it is time to release the payment due for it.
- A purchase order contains the terms of purchase; therefore, it is essential that it be signed by both – the buyer and the seller.
- An invoice is merely an indication that an order has been satisfied by a seller; therefore, it contains the vendor's signature only. The buyer does not need to sign it.
- There is no guarantee of payment to the vendor even after the issue of a purchase order. This is because only when the items delivered meet the specified requirements will they be accepted and paid for.
- An invoice is generated when the goods that a buyer requested are accepted. Therefore, for the items or goods mentioned on an invoice, a vendor is guaranteed payment by the buyer.
- Purchase orders are usually issued based on item or unit rates. There is no mention of any taxes on the items in this document.
- Invoices are documents that guarantee payment to a vendor and therefore contain all the tax details necessary for a business.
- A purchase order is a physical document that needs to be signed by both parties involved. It is on paper.
- An invoice may be printed or sent electronically to the client since it does not need to be signed by anyone other than the vendor.
- A purchase order contains the details of the items ordered, the contact information of the buyer, the purchase order number, the date of purchase, and unit rates.
- Invoices contain the detail of the items delivered, tax information, the total amount due, the payment due date, and the vendor's contact information.
Similarities Between Purchase Orders and Invoices
It may sound ironic, but for all the differences that purchase orders vs. invoices have, these documents have certain similarities as well.
Summarized below are the similar aspects of a purchase order and an invoice in a concise manner:
- Purchase orders, while raised by the buyers, intend to initiate an exchange of goods and services for money. As the buyers receive goods, they agree to pay the vendor according to the purchase order.
- Invoices, while raised by the vendors or suppliers, also have the intention of solidifying a trade of goods and services for compensation, as mentioned in the invoice. The vendor has the right to request payment for the goods provided.
- Purchase orders contain the details of the goods and services requested, just like the invoice. There are a few additional details as well.
- Invoices also contain the details of the goods and services provided to the buyer. They contain the tax details that are necessary for a business.
- Purchase orders, once agreed upon and signed by the parties involved, are legally binding documents. The terms and conditions mentioned must be adhered to.
- Invoices are also legally binding documents because they promise payment to a vendor for the items that they have provided to the buyer. If the buyer accepts the goods, then they will be bound to pay by the invoice.
- Purchase orders, much like invoices, provide an opportunity to optimize spending and budgeting by providing a clear picture of the available and ordered resources.
- In a way similar to purchase orders, invoices help vendors optimize their payment process by giving them a holistic view of the pending, released, or canceled payments.
- Purchase orders contain much of the information similar to that contained in the corresponding invoice: details of the parties involved, details of the items ordered, prices, etc.
- Invoices contain the same information as well – in addition to a unique invoice number and the detail of associated taxes.
- Just like invoices, purchase orders for specific goods list the same stakeholders as the corresponding invoice.
- Invoices raised against a specific purchase order contain the same stakeholders, which is a similarity between the two documents.
Why Do Companies Need Purchase Orders?
Although they may seem to be an added responsibility for a business, purchase orders are essential documents that help with streamlining the procurement operations of a company.
Listed below are the reasons a business should have efficient purchase order management:
- Purchase orders help to keep track of inventory stocks. The needed items can be ordered again in limited quantities, while the items already in stock can be accounted for.
- With purchase orders, businesses can keep track of the standard and quality of the goods expected without having to remember the specificities of any item.
- Purchase orders help with budgeting by accounting for the total expenditure incurred in a project in procurement.
In fact, there are more reasons for companies to generate and use purchase orders if they deal with a high procurement volume. The following reasons demonstrate the importance of purchase orders for any company:
- These documents set clear expectations for the vendors about the materials that a business is expecting.
- Purchase orders have unique PO numbers, which help eliminate duplicate requests. Since duplicity is a waste of resources where projects are concerned, purchase orders are a big help.
- Purchase orders fix the price of every item at one rate. This provides the buyer with some relief when the item rates go up because of inflation.
- Businesses can check the goods received against the specifications mentioned in the purchase orders, ensuring quality standards are met.
Why Do Companies Need Invoices?
Invoicing is an essential aspect of every business, especially for vendors, suppliers, distributors, and sellers. The following reasons compel such businesses to have an efficient invoicing workflow in place:
- Invoicing helps vendors account for all the goods and services that have been provided to buyers.
- With proper and efficient invoicing workflows, the accountancy aspect of a vendor’s business stays streamlined and updated.
- Invoicing is a way for vendors to keep track of the orders that have been fulfilled and differentiate them from those that are pending at their end.
- A well-managed invoicing system helps retain working capital for the vendor.
Benefits of Purchase Order Systems
Your business most probably deals with multiple purchase orders at once. Things being so, it is difficult to keep track of every detail manually.
Therefore, automating the process of purchase order management would be an excellent capacity augmentation for your business.
Using no-code platforms like Hubbler, you can design your own custom purchase order systems and gain the following benefits:
- Automation of purchase order management reduces the overall turnaround time by eliminating manual data entry and retrieval.
- Automation helps your business eliminate the factor of human error associated with manual tasking. It is risky to afford manual error in purchase orders since it has direct implications on the allotted budget.
- Your business can optimize the physical resources spent on the entire purchase order lifecycle by bringing most of the processes onto a digital interface. The only physical requirements would be the printed version of the final purchase orders.
- By coupling the purchase order software with inventory management software, you can further streamline the requisition and stocking process. Automation is a good way to get visibility into inventory and raise requisitions timely. You can also set reminders for items that will soon be running low on stock.
- Monitoring of purchase orders, data recall, invoice approval – more of such clerical functions can be handled seamlessly by an efficient purchase order system.
- The reduction in manual errors is the biggest benefit so far as it helps in fostering positive business relationships.
How Hubbler Can Help with Purchase Orders and Invoices
The benefits of using software for managing invoices and purchase orders depend on how well it has been designed and whether or not the software has tools and functions for your business needs.
To that end, Hubbler is a utility-oriented no-code platform that allows you to develop your own software for internal purposes. Your business is empowered to design a purchase order system that fits like a glove.
Hubbler also provides Procure to Pay solutions that are ready to set up for your convenience if you don't wish to spare time to design your own.
Now that you know the difference between a purchase order vs. invoice, it is essential more than ever to incorporate best practices and technological capacities into your purchase order systems. Your business will see tangible benefits from employing no-code platforms for a custom purchase order system.
To know more about how your purchase order management can become more efficient, book a demo with us.