Purchase orders vs invoices: What's the difference?

Deciphering the difference between purchase orders and invoices is among the most common confusions for new business owners or procurement beginners. While both documents look pretty similar and share several overlapping details, they have different purposes. 

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In this blog, we discuss the concepts of purchase orders and invoices in detail, covering what they include, when they’re issued, and why they are essential. We also summarize their key differences and similarities.

What is a purchase order?

A Purchase Order, or a PO, is a formal document that buyers issue to request goods or services from a supplier and initiate the procurement process. It shares several details on the products or services needed. Once the buyer and seller approve it, it becomes a legally binding record of agreement between the two parties. 

What does a standard PO include?

While POs can be more or less complex depending on the size of the order and the specific goods or services requested, the following are some essential inclusions you’ll find in every PO: 

• Billing name and address of the vendor and buyer
• Contact details of the vendor and buyer
• A detailed description of required goods and services, including quantity
• The unit price of goods and services
• Delivery date
• Any additional instructions for delivery or terms of the agreement
• Purchase Order Number (PON)

When do companies issue purchase orders? 

Companies issue purchase orders before purchasing to formalize the procurement process and ensure transaction clarity while placing the order. They’re issued when:

• The purchase requisition is approved
• Once vendor selection is made, in case there are competitive bidders
• To release goods under a blanket purchase order

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However, every purchase may not be accompanied by a PO. Businesses often skip issuing POs for low-cost, small purchases like office supplies and refreshments. 

Why are purchase orders important?

Issuing purchase orders supports the process of acquiring goods and services integral to the business by initiating a formal request to the supplier. In addition, it also provides additional benefits such as

• Supporting order tracking: Issuing POs allows procurement teams to track shipments and purchase activity easily once the order is placed. 

• Simplifying inventory management: A formal record of purchases requested helps avoid costly mistakes such as placing duplicate orders. This visibility becomes particularly vital as companies grow. For suppliers, it helps manage their inventory and assess when to replenish it.

• Improving budgeting: An organized PO approach helps businesses avoid miscalculating costs and quantities needed for projects. For sellers, purchase orders help plan how much to invest in stocks. Companies using budget controls through purchase orders can potentially reduce procurement costs by up to 30%. 

• Helping in dispute resolution: Purchase orders serve as a transaction record and evidence in any disputes between buyers and sellers. Research shows that 75% of procurement professionals believe having a documented purchase order system helps resolve conflicts. 

What is an invoice?

An invoice is a formal or official payment request from a supplier to a buyer.  It reflects the details of the goods or services sold and the agreed payment terms the buyer must comply with. Sellers raise it once the goods or services are delivered, and then it becomes a legally binding document. In other words, invoices are bills.

What details does a standard invoice include? 

While it is best to add as much detail as possible to avoid any confusion about the products or services rendered and cause detail in payments, the following information are compulsory to include in an invoice:

• Name and address of the buyer and the vendor
• Contact information of the buyer and the vendor
• Invoice number
• Date of invoice
• Detailed description of required goods and/or services, including quantity
• Unit price of goods and/or services, including value-added tax rate (VAT)
• Total amount due
• Any additional instructions regarding how the invoice should be paid
• The due date for payment and any fees for late payment

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Suggested Read: How To Create an Invoice: A Step-by-Step Guide 

When do companies issue an invoice?

Suppliers issue invoices after the delivery of goods or services to request payment from the buyer. They help businesses keep track of money owed to vendors and manage their accounts payable. Sellers usually issue invoices when:

• Goods are shipped 
• Customer purchases by cards
• During down payments or progress payments
• During subscription billing or other recurring invoices
• In case a proforma invoice is needed

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Would you like to create your invoice in seconds? Check out Ramp’s Free invoice maker and invoice PDF download.

Why are invoices important? 

Invoices are essential for both buyers and sellers. For buyers, they remind them of their purchases and help them keep track of money owed to vendors. For vendors, invoices are a means to request payment and track the money they’re owed for delivering goods and services. In addition, they help with the following:

• Help streamline spending: For buyers, comparing the PO with its corresponding invoice helps check for any discrepancies before issuing payments. 
• ‍Simplify tax filing: Invoices help businesses track purchases or sales and are essential for tax filing. The IRS estimates that small businesses spend an average of 55 hours annually on tax preparation. Thus, organizing invoices can significantly reduce this time.‍
• Support cash flow management: Well-organized unpaid invoices introduce transparency in accounts payable for buyers and accounts receivable for sellers. This helps both parties accurately project future cash flow. For buyers, they present an additional benefit of availing early payment discounts, should they wish to, depending on the payment terms included on the invoice.‍
• Provide investor transparency: Invoices provide investors with formal insight into a company's financial health. For buyers, they reflect their expenses, and for sellers, their revenues. Potential and existing investors are interested in these details to assess how efficiently a company manages its expenses and collects outstanding debts.

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Now that we understand the two documents, let’s move over to their differences and similarities.

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Suggested Read: How To Set Up an Automated Workflow for Invoice Approvals

Purchase order vs invoice

How are they different? 

• Issuance: Purchase orders are issued by the buyer to the seller as a request for goods or services, while invoices are issued by the seller to the buyer as a request for payment.
• Timing: Purchase orders are issued before the delivery of goods and services, while invoices are issued after goods and services have been received.

How are they similar? 

Despite their differences, purchase orders and invoices do share some similarities:

• Both include pricing and quantity details of the goods and/or services purchased
• Both have implications for budgeting and expense management

Closing thoughts: Unlock the Future of Spend Management with Ramp

As your small business or startup begins to take off, understanding and utilizing purchase orders and invoices may not be complicated. However, you'll need a different approach if you want to incorporate them into the bigger picture and optimize your procurement and spend management processes. This is where Ramp comes in and centralizes your financial management processes. 

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Ramp replaces related time-consuming, manual accounting procedures to issue or match POs and Invoices with automation. This approach makes it effortless to track financial documents and helps introduce new approaches to reducing costs and improving the bottom line.  

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At a glance, here’s what you can expect to accomplish with Ramp's vendor management and expense management solutions:

Streamline procurement

Procurement is often bogged down by manually calculated purchase orders and drawn-out approval processes. Ramp streamlines procurement across the board by introducing a centralized platform, allowing a seamless, automated approval process with real-time alerts. With it, you can give your employees access to the services they need precisely when needed.

Eliminate wasted spend

Without comprehensive oversight of active subscriptions, you may continue paying for services that aren't utilized. Ramp enhances visibility, revealing all instances of wasted spend from a centralized location and enforces automated spend controls. This helps easily restrict how much your team members spend on services and which individual vendors can charge your company.

Match invoices in seconds, not hours, with Ramp Bill Pay

Matching bills with Ramp Bill Pay is fast—and staying on top of them even faster:

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And you’re on your way—match invoices in seconds, not hours.