No matter what industry you work in, you’ve likely heard the terms "invoice" and "purchase order" pop up. But what exactly are invoices and purchase orders?
Both are essential in maintaining a smooth procurement and payment process, but while they might seem similar, each serves a very different purpose. Whether you're managing a small business or working in a large organization, knowing when to use a purchase order versus an invoice can save time, prevent miscommunications, and ensure your financial processes run smoothly.
Let’s break down the roles of both documents, when they come into play, and why each one matters — particularly when it comes to your accounts payable (AP) processes.
What is a Purchase Order?
A purchase order — or PO — is a document created by a buyer to formally request goods or services from a seller. It acts as an agreement between both parties that outlines the details of an order, including:
- Item descriptions
- Quantities
- Agreed-upon prices
- Delivery dates
- Payment terms
- Shipping or delivery instructions
When to Use a Purchase Order
Purchase orders are generally used when the buyer needs to request goods or services that require a formal agreement before delivery. This is especially common for companies that deal with large inventories or complex supply chains.
For example, manufacturers may rely on POs to request raw materials or components needed for production. In service industries, a purchase order might be used to secure vendor services over a specified period.
What is an Invoice?
An invoice, on the other hand, is a document sent by a seller to request payment for goods or services already delivered. It serves as the official bill of sale and includes key information, like:
- Descriptions of goods or services provided
- Prices (based on the purchase order)
- Total amount due
- Payment due date
- Payment terms
- Invoice date and number
Once the goods have been delivered or the service has been rendered, the seller generates an invoice and gives it to the buyer for payment.
When to Use an Invoice
Invoices are sent after a transaction has been fulfilled. If a purchase order was created, the invoice should match the details laid out in the PO, including quantities and prices. Depending on the situation, an invoice may be sent without a prior purchase order.
Invoice vs. Purchase Order: What's the Difference?
While both purchase orders and invoices are used to track vendor or supplier transactions, they have key differences — particularly when it comes to their timing and purpose in the procurement process.
How Purchase Orders and Invoices Work Together
Though they serve different purposes, purchase orders and invoices work hand in hand in your procurement process. Let’s look at the stages in a typical workflow:
Purchase Order Stage
The buyer creates and sends a purchase order to the seller, outlining what they want to purchase. This includes the terms of the agreement, like payment conditions and delivery dates.
EXAMPLE: A manufacturing company sends a PO to a supplier requesting 500 units of a specific material at a price of $2 per unit.
Fulfillment Stage
The seller receives and reviews the purchase order to make sure they can fulfill the request. If they accept the PO, they send the goods or perform the services.
EXAMPLE: The supplier agrees to the purchase order, ships the 500 units of materials, and prepares to invoice the buyer.
Invoice Stage
After delivering the goods or services, the seller generates an invoice that mirrors the details outlined in the purchase order, like quantities, prices, and payment terms. The buyer then processes the invoice and schedules payment.
EXAMPLE: The supplier sends an invoice for $1,000 to the buyer (500 units at $2 each), and the buyer processes payment per the agreed-upon terms.
Benefits of Using Purchase Orders and Invoices Together
Using both POs and invoices can benefit your financial processes through:
- Improved Record-Keeping: Both documents serve as important records that help promote transparency and accountability in your transactions.
- Reduced Errors: With a PO, you can avoid misunderstandings and disputes over pricing, quantities, or delivery expectations.
- Streamlined Accounts Payable: POs help streamline the invoice matching process. When you receive an invoice, it can be matched against the purchase order to confirm that all details match before payment is issued.
- Better Budget Management: POs help control spending by setting expectations up front, while invoices provide a clear record of all expenses made.
Do You Need Both Documents?
While many businesses use POs and invoices, not all businesses require both documents for every transaction.
For smaller companies, simply using invoices is often easiest, especially for low-value purchases. But as your business grows — and your supply chains become more complex — adding a purchase order system alongside your invoicing process can boost accuracy, record-keeping, and accountability.
Nimbello: Your Solution for PO-Based Invoices
Understanding how and when to use an invoice vs. a purchase order is key to maintaining smooth operations, ensuring clear communication between buyers and sellers, and avoiding financial discrepancies. And by using both in your accounts payable process, you can streamline procurement, prevent costly errors, and gain greater control over your budget.
Nimbello is the leading AP automation solution for businesses using both POs and invoices in their AP processes. Schedule a demo today and learn how you can leverage the power of PO-based invoices in your AP workflow!