If you’re new to the procurement process it’s not uncommon to initially be confused about the difference between a purchase order,also called a PO, and an invoice. While both documents often contain similar information, each has its own distinct purpose. And being able to understand each one, and properly utilize themis critical to the financial performance of any business.
In this article, we’ll cover the definition and significance of both a purchase order and an invoice. We’ll explain the differences and explore how small businesses can use this information to improve vendor spending and expense management across their organizations.
What is a purchase order?
A purchase order is a document issued by a company as a request for goods or services from a supplier. The initial purchase order is the first step in the procurement process. And it outlines the products or services required, including details such as quantity, price, and date of delivery.
Once a purchase order is finalized and approved by both the buyer and the seller, it becomes a legally binding document. Then it functions as the record of the agreement between the two parties. After the goods or services detailed in the purchase order have been delivered, the supplier will send a corresponding invoice to be paid by the buyer at a future date.
Why are purchase orders important to streamline?
Understanding and using purchase orders correctly is critical for nearly all businesses. Beyond being necessary for acquiring goods and services that are integral to the business, purchase orders can provide businesses with some significant benefits.
Tracking orders and inventory management with purchase orders
Using a purchase order system allows small business owners to easily track shipments and purchase activity. This helps you avoid costly mistakes like placing duplicate orders. And for small businesses, the visibility provided by the PO system only becomes more important as the company grows. Because as there is more growth, the inventory grows too, making it harder to keep track of sometimes.
Using purchase orders for budgeting
Maintaining a thoughtful expense management strategy and sticking to your budget is critical for any growing business. In the absence of an organized purchase order system, businesses risk miscalculating costs or the number of goods needed for a project. Over time, such mistakes can have a negative long-term impact on the bottom line.
Using a purchase order to resolve disputes
Relationships with vendors don't always run smoothly; deliveries might be arriving late, quantities may be off, or the price on an invoice could be different than what was originally agreed upon. In any of these instances, a purchase order can serve as a record of the transaction, and be utilized as evidence in the event of a dispute between a business and its supplier.
What should purchase orders include?
A purchase order can be more or less complex depending on the size of the order and the specific goods or services being requested. Generally,a standard purchase order should include the following:
- Name of the vendor and buyer
- Address of the vendor and buyer
- Contact information of the vendor and buyer
- A detailed description of required goods and/or services, including quantity
- The unit price of goods and/or services
- Delivery date
- Any additional instructions for delivery or terms of the agreement
- Purchase order number (PON)
What is an invoice?
An invoice is a document sent to a business from a supplier after goods and services have been delivered. The invoice acts as a formal request for payment and contains the details regarding the items purchased, the unit cost, and the total amount due to the supplier. Many invoices will also include specific instructions or options for payment. Invoices are legally binding documents reflecting the official sale of goods, and the buyer must honor the payment terms as outlined in the agreement.
Why is invoice creation so important for small businesses?
At the most basic level, invoices are basically bills. They’re important because they serve as reminders of purchases made and help businesses keep track of money owed to vendors. Similarly, vendors rely on invoices to request payment. And to keep track of money owed for delivering goods and services. But how invoices are treated across an organization has additional implications, and businesses should take care to optimize invoice management for the following reasons:
Filing taxes isn’t a fun activity whether you’re a large or a small business. But it can be an absolute nightmare if invoices aren't organized and properly recorded. In order to save time, money, and frustration, it’s critical to streamline accounting processes across the board, including how invoices are filed, categorized, and accessed.
Additionally, businesses might consider integrating automated invoice processing technology to increase oversight. It can help keep track of payments due and eliminate the chance of missing an invoice on a tax statement.
Aiding accounts payable/receivable
As small businesses and startups get off the ground, it's critical to ensure that the company’s balance sheet is as accurate as possible. This can help make bookkeeping less complicated as the business scales. All unpaid invoices should be properly organized and easily accessible to make accounts payable, or debts owed to vendors and suppliers, as transparent as possible.
Similarly, vendors need to create detailed invoices in order to keep track of accounts receivable.s outstanding payments owed to the company are important for accurately projecting future cash flow.
Providing transparency to any potential or existing investors
Invoices, whether related to purchases or sales, tell a story on the balance sheet about the overall financial health of the company. Naturally, existing and potential investors will be interested in how efficiently a company manages expenses across the organization and collects outstanding debts.
What should you include on your invoices?
When you create an invoice you should add as much detail as possible to avoid any confusion about the products or services being purchased as well as the associated cost. This will help minimize disputes and prevent delays in payment caused by inquiries regarding the invoice. Additionally, businesses often choose to customize the presentation of their invoices to reinforce brand recognition.
At the bare minimum, a typical invoice should include the following:
- Name of the buyer and the vendor
- 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
- Due date for payment and any fees that will be added for late payment
To cFollow the steps above to create your invoice, or check out our free invoice generator.
Purchase orders vs invoices
While both purchase orders and invoices are related to the purchase of goods and services, they are two entirely separate documents with different intended use cases. The easiest way to remember the difference is to consider who is issuing the document. And at what point in the procurement process the document is being issued.
With that in mind, the two primary differences between a purchase order and an invoice can be described as follows:
1) Purchase orders are issued by the buyer to the seller as a request for goods or services. Invoices are issued by the seller to the buyer as a request for payment.
2) Purchase orders are issued before the delivery of goods and services. Invoices are issued after goods and services have been received.
Purchase orders and invoices also differ in terms of layout, as well as the specific information contained in each document. For example, an invoice includes the value-added tax on the price of goods, whereas the purchase order does not. Additionally, the purchase order might include instructions regarding how the item should be prepared or delivered, whereas the invoice merely confirms which items have been purchased and the associated cost.
What are the similarities between purchase orders and invoices?
Purchase orders and invoices are different documents with different use cases, however, there are a number of similarities that might result in unnecessary confusion. Here are a few of the main similarities between the two:
- Both relate to the purchase of goods and/or services
- Both include descriptions of goods and/or services being purchased, including quantity
- Both include the unit price of goods and/or services
- Both have implications for budgeting and expense management
Unlock the future of spend management with Ramp
As your small business or startup begins to take off, chances are you won’t have too many problems understanding and utilizing purchase orders and invoices. But while cutting through the confusion surrounding these two documents is one thing, incorporating them into the bigger picture and optimizing your procurement and spend management processes is another.
This is where the Ramp platform comes in: By centralizing financial management processes and replacing time-consuming, manual accounting procedures with automation, not only does keeping track of financial documents becomes effortless, but new methods are continuously revealed for cutting costs and improving your organization’s bottom line.
At a glance, here’s what you can expect to accomplish after implementing Ramp's vendor management and expense management solutions:
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 that allows for a seamless, automated approval process with real-time alerts, providing employees with access to the services they need exactly when they need them.
Eliminate wasted spend
Certain SaaS platforms may be critical to your operation, but in the absence of comprehensive oversight of active subscriptions, businesses often continue paying for services that aren't being utilized. Ramp not only enhances visibility, revealing all instances of wasted spend from a centralized location, but allows automated spend controls to be enforced, easily restricting how much team members spend on services, and which individual vendors can charge your company.
Automate outdated processes
From collecting and matching receipts, to expense categorization and bookkeeping, businesses today waste too much time and too many resources manually executing tedious processes. Ramp’s tools can be used to automate all of the above, saving accounting teams countless hours that would be better spent on strategic financial planning, dramatically increasing accuracy, and reducing the possibility of human error.
Finally ready to transform your accounting processes and unlock the future of spend management with Ramp? Click here to get started.