Finance departments in most businesses deal with purchase orders and invoices every day. In essence, this means that the two are crucial documents of the account payable process.
But, what’s the difference between a purchase order and an invoice? Well, by the end of this post, you’ll know the fundamental differences between the two. Most importantly, you’ll learn how manual purchase orders and invoices can harm your business and why you should switch to the electronic purchase process.
Let’s dive right into it. But, before we take the plunge, let’s get a couple of things out of the way.
What’s an Invoice?
An invoice is a time-bound commercial document sent to a buyer by a seller. It lists and records the transaction between the two trading partners. An invoice asks for payment of goods or services bought on credit. Generally, there are two types of invoices; paper and electronic invoices.
Paper Invoices – These are, well, paper-based. They come in print form and are sent via mail or dropped to the client’s physical address.
Electronic Invoices – These are available in a structured electronic format. They’re processed automatically and electronically. Electronic invoices are becoming increasingly popular as the business world adopts digital transformation.
What is a Purchase Order?
A purchase order (PO) is a commercial document sent from the buyer to a supplier confirming the order for products or services. Once the seller accepts the PO, he/she becomes legally bound by the document’s contract status. Likewise, if the buyer refuses to pay, the seller can seek legal redress guided by the document’s terms and conditions.
What Are the Differences Between a Purchase Order and an Invoice?
The primary difference between a purchase order and an invoice is that a purchase order confirms an order while an invoice requests an order’s payment.
Still, there are more differences as listed below.
- Initiated by the buyer
- Received by the seller
- Sent at the onset of an order
- Indicates the day the purchase was made
- Contains the name of the company buying the goods and services
- Describes the amount of goods or services offered
- Indicates the prices
- Contains payment information, billing address, and purchase order number
- Indicates the shipping address and the expected delivery date
- Initiated by the seller/vendor
- Received by the purchaser
- Sent after the completion of an order per the payment agreement
- Contains date of purchase, name of buying company, and the quantity of goods/services ordered
- Includes the invoice number and the seller’s contact information
- Indicates credits and discounts as well as the payment schedule
- Show the total amount due to the seller
What are the Similarities Between a Purchase Order and an Invoice?
Indeed, there are apparent differences between a PO and an invoice. However, the two documents are similar in several ways.
Legal Stand Point – A purchase order and an invoice are legally binding contacts. In essence, this means the seller and the buyer must fulfill the details of the documents. Either party can file a legal suit against the party that fails to meet the actions outlined in the documents. On top of that, both documents include mailing information, order details, and prices. The invoice shows the vendor’s contact information and the invoice number and any adjustment to the payment. It also includes the total amount owed to the vendor and the payment schedule.
Further, an invoice includes a PO number as a reference.
Why Use an Invoice for Business?
There are several reasons you should use an invoice in day to day operation of your business. These include;
- An Invoice Allows You to Collect Money
The number one benefit of using an invoice is to enable you to get you paid on time. Keep in mind that most buyers will not pay you for goods or services delivered until you send them an invoice. Sure, you can call or send an email, but most will insist that you forward an invoice for record-keeping purposes on their end.
- An Invoice Offers Transparency on Spending
You have to keep track of your business’s spending. Otherwise, it’ll be hard to know which direction the enterprise is heading.An invoice is a reminder of why you’re spending your money. With such insights, the accounting department can know how various departments are spending their money. That way, it becomes easy to cut unnecessary spending.
- An Invoice Allows You to Manage Payments
An invoice contains the number of goods or services sold. It also shows the amount of money paid to date and the outstanding arrears. That information helps businesses take control of how they make payments.
Why Use a Purchase Order for Business
A purchase order is an essential business document, whether you’re a small outfit or a large organization. What follows is a rundown of the benefits of using a PO for business.
It Helps Define Expectations of Both Parties
Purchase orders allow buyers to define what they expect from sellers in clear terms. Besides, both trading partners can use the terms to instigate a suit if the set conditions aren’t followed.
It Helps Manage Orders
A purchase order allows the operation, accounting, and procurement departments to track incoming and pending deliveries. That way, they can trace and manage orders efficiently.
It Helps With Budgeting
You must have a budget for your business. A purchase order allows buyers to determine extra costs, such as transportation in advance, enabling them to spend reasonably.
It Is a Legal Document
You don’t need a formal contract to pursue a seller who doesn’t fulfill their obligation. A purchase order is a legally binding business document. Note – A purchase order only becomes legal after the seller accepts it.
It Helps in Auditing
Any serious business should do audits every financial year. With a PO in place, it becomes easy to conduct audits.
Invoicing and the Three-Way Matching Process
The purchase order vs. invoice comparison isn’t complete until we talk about the three-way matching process. So, what is the three-way matching process?
For starters, this is a process of comparing a PO against goods or services note against the supplier’s invoice. The comparison happens before paying for the invoice. The idea is to help determine if the invoice will be paid partly or wholly. It also helps ensure that only the correct invoice gets paid.
From the description above, three documents are essential to the process. These are;
- Purchase orders
- Order receipts or packing slips
The exact process includes reviewing quantities, prices, and terms to ensure that the vendor fulfilled what was expected as per the terms of the purchase order. The buyer can refuse to pay in case of variation in pricing, quantities, or if there are damaged goods. Once the invoice undergoes the three-way process, the buyer can pay as per the vendor’s terms. The three-way process can help your business save money by double-checking information and highlighting inconsistencies before payment. It also helps strengthen buyer and seller relationships.
Why are we talking about the three-way process? That leads us to our next point.
How Manual Purchase Order and Invoicing Can Hurt Your Business
Make no mistake about it; the three-way matching process makes perfect sense.
On the downside, however, it is still a manual process. And guess what? Manual processes have no place in today’s digital business world.
Think of it;
Processing purchase orders and invoices manual is prone to poor budget control, inefficiencies, higher costs, and errors.
On top of that, manual purchase orders and invoicing can cause;
- Lack of transparency
- Delay in the purchase order processing cycle
- Lack of compliance
- Poor communication between the people involved
Do you know what the good news is?
You can switch to electronic purchasing and help your business escape the disadvantages of the three-way matching process.
The Electronic Purchase Process and its Benefits for Business
Electronic purchasing gives businesses more transparency and control. It allows you to take charge of the purchase-to-pay process in its entirety. Here are some of the advantages of e-procurement for business.
- It Reduces Costs
Automating the purchase process eliminates duplicate spending. It leverages bulk buying while saving you expenses related to paper-based purchase orders and invoices. And, because you’re exchanging documents electronically, you will not incur mailing and stamp costs.
- It Encourages Transparency
Electronic purchase order solutions make it easier to compile and analyze reports on your procurement system. In essence, this means you can ensure your purchase procedures are in line with your policies.
- Increased Productivity
E-procurement is faster and less time-consuming compared to traditional procurement. Besides, with your records stored electronically, it is easier to make repeat orders. Electronic purchasing implies you can have templates that you can fill out quickly, saving you tons of time while increasing productivity.
- It Eliminates Paperwork
One disadvantage of using paper-based POs and invoicing is the bulk of paper involved. With e-procurement, however, that shouldn’t be a cause for concern. Your documents are saved and stored in the cloud, reducing the need to create more room to keep all the paperwork. And, with your data stored in the cloud, you can find retrieve older POs and invoices quickly.
- Improved Transaction Speed
Electronic purchasing is super-efficient and time-saving. More specifically, it simplifies the purchasing process and, by extension, increases the transaction speed. The ripple effect is a better relationship with your trading partners. Plus, because e-procurement reduces unnecessary tasks, you can concentrate on other business growth strategies.
- It Standardizes Buying
When you have several departments in an organization making the buying decisions, there’s a higher possibility of errors and omissions. Electronic purchasing of goods and services makes it easier for all departments to abide by the firm’s procurement of standards.
- Reduced Errors
Electronic document exchange reduces errors to near zero since there’s no printing or manual filling of data.
To fully enjoy the benefits of electronic purchasing, it makes perfect sense to automate invoice processing. The best invoice solutions will match incoming invoices with purchase orders, goods receipts, and payment schedules. Once reconciled, the system will process the invoice automatically based on the pre-determined rules. And, in case the system cannot reconcile the invoices, it’ll search for the named contact on the invoice for approval.
Unimaze – Helping you Automate Your Purchasing Process
Automating your purchasing process doesn’t have to be challenging. All you need to do is find purchase order solutions and invoice solutions that work for your business model. Put differently; look for e-procurement software that can handle the particular needs of your purchasing function. That way, you can leverage electronic purchasing and all the benefits that come with it. At Unimaze, we’ll help put all the power of automation right into your system. With the right software, you can customize workflows, generate purchase orders, pay invoices quickly, and, most importantly, experience zero errors.
Frequently Asked Questions (FAQs)
- Does the Unimaze purchase order solution integrate with accounting and other financial systems?
Yes. However, ease of use depends on the specific e-procurement software and accounting system you use. Overall, the Unimaze software works with a variety of accounting systems and ERPs.
- How much will I save with the Unimaze invoice solution?
Well, this depends on the size of your organization. Our solution will help you save on paperwork while allowing your employees to concentrate on other productive activities. Of course, the bigger your organization is, the more the savings.