When you are starting out in your business, especially those businesses related to the sale of physical goods, you need to catch up to some familiar business terms.

At some point, you’ll come across two terms that seem very similar: purchase order and invoice.

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These are two commonly confused financial terms and they can often seem like the same thing. They are both important, but businesses usually tend to forego purchase orders because of the perceived increase in paperwork.

However, this is not wise, as purchase orders help clarify what is expected of the supplier in terms of goods and services. Furthermore, as the relationship between the buyer and supplier improves, it is crucial to have a legal document that will help clarify or avoid any confusion and potential legal action.

What is a purchase order?

A purchase order is a document initiated by the buyer and sent off to the seller. It is a summary of the goods and services that the buyer is planning on purchasing from the supplier.

It includes a list of the products or services, the quantity, and the agreed-upon price. Once both sides agree to the purchase order, it becomes a legally binding contract between the two parties. Therefore, the buyer should be clear and explicit in communicating what the requests are so that there will be no confusion when the supplier receives the purchase order.

Usually, two purchase orders are sent, one externally and one internally. The external purchase order is sent to the supplier, while the identical internal purchase order is sent to the accounts payable department in order to match it with the future invoice.

The purchase order includes the following details:

• the date the purchase order is issued
• the name and address of the buyer
• the name and address of the supplier
• the purchase order number
• details about the goods or services being ordered
• the transaction terms and conditions

Who is it useful for?

The purchase order is important for any buyer purchasing goods and services from a seller, supplier, or vendor. Although purchase orders may seem like unnecessary extra work, especially for small businesses, purchasing demands tend to change as buyer and seller relationships evolve.

Demand increases or decreases, becoming more specific, complex, or urgent, and with mistakes in communication there can be real discrepancies between what was expected and what was received.

A purchase order helps to set clear and explicit expectations and avoid any confusion. Therefore, purchase orders are useful for any business purchasing goods or services from a supplier and should be part of the normal finance processes.

What is an invoice?

An invoice, on the other hand, is a document sent by the seller to the buyer. It is a summary of the goods and services the buyer has purchased (or agreed to purchase).

An invoice can be sent after the purchase order has been agreed upon and payment has been sent. Alternatively, an invoice can be sent (as with most small businesses and freelancers) after goods and services have been delivered, usually with a payment due date. There is also the option, as with many services, for the payment to be paid in part before and after the invoice is sent.

Once the invoice is agreed to, it becomes a legally binding document and indicates a debt that the buyer owes to the seller.

There are different types of invoices, but usually they include the following information:

• the date the invoice is issued
• the name and address of the seller
• the name and address of the buyer
• the invoice number
• the purchase order number, if a PO was issued
• details and quantity of the goods and services provided
• the agreed-upon prices
• any discounts or taxes
• the total amount that is due
• transaction terms and conditions (optional)
• payment due date

Who is it useful for?

Invoices are important finance documents. They are mandatory for any business that has provided goods and services and has either received payment or is expecting payment.

In that way, all businesses need to have invoices, as they are either purchasing or selling something. There are many ways to create and use invoices.

However, it is often recommended to use invoicing software instead of invoicing templates as the software offers greater flexibility, speed, and simplicity. Most business with online invoicing software can create and send out invoices within 60 seconds, whereas invoice templates take much longer on average.

Purchase Order or Invoice?

If you are trying to determine which document is most important, we should state very clearly: invoices are very important from a legal standpoint, and purchase orders are very important from a clarification and conflict avoidance standpoint.

They will both be very useful for your business and help improve its productivity and strength.

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