There’s a lot of business terminology and processes to learn as a new small business owner. Whether you have opened your physical doors or are working as a digital freelancer, you are running a business. You have to understand profit and loss calculation and reporting. As well, you need to know the difference between gross and net income, work out favorable payment terms for your business and invoice clients on time to maintain a positive cash flow.
Then, there’s ROI, accounts receivable, accounts payable, etc. And these are just the simple basics of accounting that you must do.
Two other important terms ( and related documents) are purchase orders and invoices, especially the similarities and differences between them, their importance, and how they should be utilized. That’s exactly what we’ll tackle in this blog post.
What is a Purchase Order?
The key word here is “purchase.” In days gone by, when businesses needed to purchase items from a supplier, they often called that supplier or visited him at his place of business. Some of that still happens today (e.g., going to an office supply store to purchase items – pens, pencils, printer paper, even hardware, etc.). But more often than not, these purchases are made digitally, so that they can be conveniently delivered.
Enter the “world” of the purchase order (most often referred to as a PO). This is a document that specifies all of the details of a purchase you are making:
- the products or services being ordered
- the prices for such things
- the date of the order
- expected delivery
- the terms for making payment.
Whether your business involves crafting PO’s to make purchases or for receiving purchase requests from others, the PO has become a key document in efficient business operations.
It’s important, however, to understand the difference between a purchase order and purchase requisition. In larger organizations, purchases must often be approved before an actual purchase order can be created. So a manager submits a purchase requisition internally and, once approved, starts the process of creating the purchase order. Small businesses and freelancers mostly do not need requisition forms.
What To Include in a Purchase Order?
Businesses can create their own purchase order form or use any of the purchase order templates that are available online. And if they are accepting purchase orders from others, then they will undoubtedly receive a variety of different forms. However, all PO’s will include the following information:
- A PO number (this allows clear tracking)
- Date of the order
- A list of the products or services being ordered, including unit and total prices
- Name and address of both the purchaser and the seller
- Any other specific terms and conditions (e.g., expected delivery)
- A signature of the purchaser, usually including title
You can easily be involved in both the sending and receiving of purchase orders. If you order any products or services from suppliers, you will want to use a PO system, as well as technology and tools that will manage and track your orders.
The same goes for being on the receiving end of PO’s. When you are a seller, you must track those purchases, manage their fulfillment, and confirm delivery of what you have sent to the purchaser. The delivery confirmation is especially important, because invoicing for payment will be based upon that.
As either a purchaser or seller, or both, you need a database that will manage these documents. That database can be used to help you track your inventory; it can help you know when you need to make a re-purchase of regularly ordered items from suppliers.
Benefits of Having a Purchase Order System
These are several major ones. Among them, you should think about the following:
- Orders tend to be right the first time. And they do form a legal contract. The use of a PO system also prevents disputes about what has been purchased, what is to be paid, etc.
- Management of purchases and costs. A PO system can keep track of the amount a project or product manufacturing actually costs. It will also help to track inventory if you are a seller.
- A system saves time. When team members can look up PO’s within the system, paying invoices or creating those invoices is far more efficient. PO’s and invoices can be matched through the system, and receipts and payments can be streamlined.
- Many businesses (and public authorities) require PO’s to do business, either as suppliers or purchasers. If you ever anticipate doing business with such entities, you need a PO system in place. For instance, governmental organizations will require you to submit a valid PO. Otherwise, they will not be able to process your invoice.
Ultimately, a purchase order system can save you plenty of time on admin work. As well, it ads extra clarity to your business processes and facilitates the management of common processes.
What is an Invoice?
The traditional terms for an invoice include such things as “bill” or “statement.” In short, they are documents that show what a purchaser owes to a seller, are generated by the seller, delivered to the purchaser, and specify important details. Invoices are created in response to delivery of products and services that were originally specified in a purchase order.
Generally, invoices will include:
- A date that the invoice is issued
- An invoice number
- Names and addresses of the seller and purchaser
- A reference to the related PO number
- Exactly what was purchased and quantity purchased with corresponding prices
- Any discounts (usually agreed upon in advance)
- Sales taxes
- The total amount due
- Terms of payment/due date
As a business owner or freelancer who must send out invoices, you need the following:
- You need to know how to make an invoice.
- If you don’t want to make your own from scratch, then you can find free invoice templates that can be customized for your needs
- You need a system for tracking all of your invoicing. It should match invoices to purchase orders, track when an invoice was sent out, when payment is due, when payment has been made, and when payment is overdue.
- There must be a system in place for sending out additional payment reminders – past due invoices when invoices are not paid by the established due date.
Similarities and Differences Between Purchase Orders and Invoices
There are a few similarities between purchase orders and invoices:
- Both are related to buying and selling of products or services
- Both involve documents exchanged between buyers and sellers
- They are legal documents. Once a seller accepts a purchase order, it becomes a legal contract; and once the products or services are delivered, the invoice becomes a legal contract, based upon that purchase order.
This is where the similarities end, however. Here are the differences:
- The buyer is the one who’s mostly responsible for crafting a purchase order when buying products or services. An invoice is drafted by the seller once the terms or the purchase order are fulfilled.
- The purchase is sent to a seller. the invoice is sent to a buyer
- The purchase order details the items and costs to be paid. The invoice details all of those details as well as the terms of payment and the due date
- The purchase order is crafted at the beginning of a transaction. The invoice is crafted and sent following fulfillment of a purchase order.
- A purchase order system is used to keep track of what was ordered and when, as well as when delivery has been made; an invoice system is used to track and manage payments and accounts receivable (payments not made yet).
Invoicing Best Practices
As a small business owner or freelancer, you know that your survival can often depend on getting paid regularly and on time. Having accounts receivable out there and customers/clients who are not paying on time can be disastrous. In fact, in a recent study, 80% of small business owners state that they receive payments well after their due dates.
It is one thing to find the perfect invoicing template; and it is great to have a digital system for tracking invoicing and payments. But getting those payments on time may take additional work on your part. Here are some things you can try:
- Set up an automated system of reminders so that customers receive a friendly notice that the invoice is coming due.
- If you have customers with recurring monthly payments, don’t waste your time creating and sending an invoice. Set up automated payment deductions and offer a discount for customers who take this option.
- Offer a small discount to clients who pay ahead of the due date.
- Anything that you can do to establish a more personal relationship with your customers/clients will help in your efforts to get paid on time. If they come to know you as a person, they can feel a greater sense of obligation to pay you on time.
There you have it – the differences between purchase orders and invoices. Once you understand the differences between them and the uses of each one, you have one more piece of business acumen under your belt.
And if you need a professional invoice template for your business, we have plenty of great options available for free. Be sure to check those out!
Photo by Michal Jarmoluk