Purchase Order Vs. Invoice. Understanding the Difference
Purchase orders and invoices form the backbone of sound business decision-making. They help you remain compliant, optimise your inventory management and keep track of your financial health.
They both contain details of your business activity. As a result, the terms are used interchangeably.
This couldn’t be more misguided – purchase orders and invoices are used for very different reasons.
What makes them different?
This article will help you understand the differences between a purchase order and an invoice.
This article at a glance
Purchase orders and invoices contain details of your financial business activity – from order details and prices to vendor and shipping details. But they’re different documents. It’s critical for international merchants to know when and how to use purchase orders and invoices.
What is a purchase order?
A purchase order (PO) is a document that a buyer sends to a seller after ordering goods or services. A basic PO usually contains the following information:
- PO number
- Date of purchase
- Description of order
- Unit price
- Date of delivery
- Buyer’s name
- Buyer’s address (shipping address)
- Vendor’s name
- Vendor’s address (billing address)
- Tax information
- Terms and conditions
- Signature of the PO issuer
Your PO can also include extra prerequisites that you have agreed upon with the other party. For example, you could request that the vendor sends the goods strictly by sea freight, or that you want to pay using a certain payment method.
Why do you need a purchase order?
1. It’s a legally binding document
Carefully read through all the terms and details listed in the PO before signing it – the PO document becomes a legally binding contract after it’s signed by both companies.
2. You can track where your goods are
An accurate PO number allows you to see which goods were ordered, the person who made the order, and the actual date of the order. Without a PO, you may end up making duplicate orders and suffering a loss.
3. Prevent cost overruns
Once the PO is signed, both parties should be clear on the price stated on the PO. If either party decides to increase the price, it can be disputed with the help of the initial price listed on the PO.
4. Optimises inventory management
Inventory stock-outs can be prevented with a PO system. Companies can determine how much stock to keep in their inventory, what to replenish and when.
5. Improve budgeting issues
Setting up a PO system allows you to calculate order quantities and costs even before the project commences. This allows you to optimise budget efficiency.
What is an invoice?
An invoice is a document that a seller or supplier creates to track and solicit payments. You send an invoice after the issuing of a PO – a seller will send out an invoice after the terms of a PO have been met through a finished shipment of the product or completed service.
Catherine is a supplier of pet food. She received a PO for 200 cans of pet food from a pet store. When Catherine sends the boxes out, she will include an invoice stating the details of the product that was sent.
What’s included in an invoice?
- Invoice date
- Invoice number
- PO number (if any)
- Details of product or service
- Unit price
- Payment terms
- Discounts/taxes (if applicable)
- Total amount due
- Invoice due date
- Modes of payment
- Seller and buyer’s business names and contact
- Seller signature
Differences between purchase orders and invoices
Remember, you’re sending out POs and invoices for two different purposes. They also require different information.
Here’s a simple table for reference.
|Purchase order (PO)||Invoice|
|Purpose||Confirms the order and requests supplier to deliver the product or service||Requests payment for the order that was delivered|
|Sender||Buyer||Seller or supplier|
|Receiver||Seller or supplier||Buyer|
|When is it sent out?||When the buyer places the order for the goods||After the seller delivers the product or service and the order is fulfilled|
|Required information||Detailed description of the order, the agreed-upon price, and the estimated time of delivery||Terms of payment, applicable discounts, and total amount due|
Buyers use purchase orders to ensure order fulfilment. Sellers send invoices to collect payment.
Purchase orders and invoices help you maintain accurate records of purchases you made for your financial statements. If you’re worried about the tedious process of paper-based POs and invoice processing, make the switch to digital.
Many finance platforms offer digital accounting and invoicing services. These companies include Osome, Stripe, Xero, Tide, and many more. A simple Google search will give you your answers.
What next? You need a smart banking solution.
Sending and receiving purchase orders and invoices can be a troublesome process, so your payment process should be as straightforward as possible.
At Silverbird, we offer you a smart alternative to traditional banking. Hold, transfer and exchange foreign currencies online simply by using a single account. In order to avoid facing low forex rates when transferring your funds, we offer multi-currency accounts catered to international merchants like you, so that you can convert over 30 currencies within a single account.
Start onboarding today.
Author: Silverbird Content Team
Illustration: Kate Faldina