When running a business, two common terms you’ll often hear are “purchase order” and “invoice.” But what do these terms mean, and how are they different?
We're here to break it down into simple words, helping you understand these terms easily, especially if you’re just starting out your business and want to run your first sales event successfully at stores or online.
Understanding purchase orders
A purchase order (PO) is like a shopping list you give to a seller. It says what you want to buy, how much of it you need, and what price you’re ready to pay. It's a promise to pay once you receive what you asked for. This document is pretty much set in stone once the seller accepts it - kind of like making a promise you can’t back out from. You can use a purchase order template to make this easier, and there’s also purchase order software that speeds up the process.
When issuing or receiving a purchase order, there are several fields you should pay attention to:
Buyer and Seller Details: This includes names, addresses, and contact information for both parties.
Purchase Order Number: A unique identifier that helps track and manage the order.
Description of Goods or Services: This includes information such as type, quantity, specifications, and any other relevant details about the items being ordered.
Price and Payment Terms: The agreed-upon price for the goods or services, along with the terms for payment (e.g., net 30 days, upon delivery, etc.).
Delivery Details: This includes the delivery date, shipping method, and delivery location.
Terms and Conditions: These may include penalties for late delivery, warranties, and other agreed-upon terms.
Signatures (if applicable): For certain transactions or companies, a signature may be required to validate the purchase order.
An invoice is like a bill that the seller sends you after delivering the goods or services. It says, “Here’s what we delivered, now it’s time to pay up.” It breaks down the costs, how many of each item they delivered, and the total amount due. You’ll usually receive an invoice after you get what you ordered, and it’s your cue to make the payment.
When creating or receiving an invoice, here are some of the commonly-seen fields (we know how it can look very similar to a purchase order):
Invoice Number: A unique identifier for each invoice, essential for record-keeping and references.
Invoice Date: The date when the invoice is issued.
Due Date: The date by which the payment is expected.
Business Information: The name, address, and contact information of the seller.
Customer Information: The name, address, and contact information of the buyer.
Item/Product Description: Details of the goods or services provided, including names or descriptions.
Quantity: The number of units of each item or service provided.
Unit Price: The price per unit of each item or service.
Total Price: The total cost for each type of item or service (Quantity x Unit Price).
Subtotal: The total cost of all items or services before taxes and additional fees.
Taxes: The amount of taxes applied, often itemized based on different tax rates or types.
Discounts (if applicable): Any discounts applied to the total amount.
Shipping Fees (if applicable): The cost of shipping if it's relevant to the transaction.
Additional Fees (if applicable): Any other additional costs not included in the subtotal.
Grand Total: The final total amount due, including taxes, discounts, and additional fees.
Payment Instructions: Detailed information on how to make the payment, including accepted payment methods, bank details for wire transfers, etc.
Purchase order vs invoice: A simple breakdown
A purchase order is a document you send to a seller showing what you want to buy and an invoice is a bill that the seller sends after delivering the items or services. You make the purchase order before getting your items and you get the invoice after.
Creation and Issuance:
Purchase Order: POs are created by the buyer using a purchase order template or digital purchase order software. They are before receiving goods or services.
Invoice: Invoices are generated by the seller, often using invoicing software or an excel template. They are issued after delivering goods or services.
Content and Details:
Purchase Order: POs contains a detailed list of items or services the buyer intends to purchase, often itemized with descriptions, quantities, and agreed prices. A purchase order number is crucial for tracking and future references.
Invoice: An invoice contains an itemized list of goods delivered or services rendered, including quantities, unit prices, and total due. Instead of a PO number, an invoice usually includes the invoice number and payment details.
Purpose and Role in Transaction:
Purchase Order acts as a legal offer to buy; becomes a binding agreement when accepted by the seller. It’s essential in B2B businesses for the purchase process, when it comes to order confirmation and inventory management.
Invoice serves as a bill, requesting payment from the buyer. It’s crucial for payment processing and financial record-keeping.
Digital Management and Processing:
Purchase Order: Businesses often utilize purchase order software for creation, tracking, and management, ensuring efficiency and easier tracking. Digital purchase order systems are popular for their automation and accuracy. They can range from simple solutions like a purchase order Excel template to more advanced options like QuickBooks. Platforms like Lark often offer free templates and automation to help businesses manage purchase orders.
Invoice: Invoices can be managed and processed digitally, often integrated with purchase order systems for seamless transactions. Digital processing aids in quick and accurate financial accounting and reporting.
Document Status and Payment:
Purchase Order indicates the intention to purchase and is not a bill or request for payment. It’s often used in purchase order financing to secure short-term business finance.
Invoice indicates a request for payment upon completion of the order. It's the document that signifies the completion of a transaction and initiates the payment process.
In the business world, having a clear system to manage your purchase orders and invoices is super important. It makes sure that there’s no confusion between you and your sellers. Tools like QuickBooks purchase order systems or even a digital purchase order can help keep everything organized and speedy.
Why digital is the way to go?
Going digital makes everything easier and faster. You can create, send, and manage your purchase orders and invoices online. No more losing papers or waiting for snail mail.
Digital purchase order systems help you track all your orders and payments in one place. Plus, you can find free purchase order templates online that are a breeze to use, when you just get started running a new business.
1. Efficiency and Speed
Digitizing purchase orders and invoices dramatically speeds up the procurement and payment processes. With digital systems, businesses can create, send, receive, and process these documents almost instantaneously, reducing the time traditionally spent on manual creation, approval, and filing.
Automation features integrated into digital systems can eliminate repetitive tasks, improving efficiency and enabling employees to concentrate on more strategic activities. For instance, businesses can utilize Lark Base to effortlessly create purchase orders. Purchasing managers can input the necessary information using a form and then utilize an extension to automatically populate this information into a formatted table for generating PDFs.
2. Accuracy and Clarity
Digital systems minimize the risk of human errors associated with manual handling. With features like auto-fill and templates, businesses ensure consistency and accuracy in every document. There's also enhanced clarity in transactions as digital documents are easy to read, process, and track.
Each entry, change, or approval records can be retrieved when you just use free digital tools like Lark, offering transparent tracking and auditing trails. This accurate and clear method of handling purchase orders and invoices is crucial in maintaining reliable business records and relationships.
3. Cost Reduction and Eco-Friendliness
Transitioning to a digital platform means businesses can reduce costs associated with paper, printing, storage, and handling of physical documents. It’s not only a cost-effective alternative but also an eco-friendly option that reduces paper waste.
In addition, digital storage ensures that all documents are organized, easily accessible, and secure. It reduces the physical space needed for storage and ensures that vital records are safeguarded against physical damage or loss. It's a modern approach aligning with global trends towards sustainability and cost-efficiency.
Purchase order marks the beginning of a business partnership while invoice signals the completion of it. Keeping track of both is important, and digitizing them will help your business grow without worrying about discrepant purchases.
Whether you're a seasoned pro or just starting your business journey, understanding these terms is a step towards making your business processes smooth and hassle-free. Happy buying and selling, and contact the Lark team today if you would love to further automate your PO or invoice generation using a free template in Lark Base.