A purchase order is an official, often legally binding document that is sent from a buyer to a seller, documenting the agreement for the sale of specific products and/or services that will be delivered later. A purchase order allows the buyer to place an order to a supplier without the immediate requirement to send a payment.
Like invoices, purchase orders all have a unique number that’s used to track them in both companies’ accounting processes. Sometimes, blanket purchase orders are issued—these are ongoing requests for goods and/or services that will remain active until they’re stopped by the buyer or a specified threshold is reached.
When understanding the difference between a purchase order and an invoice, it helps to think of two sides of the same coin. A purchase order is what’s created by a buyer, and an invoice is what’s created by the seller.
A purchase order is sent before any transaction has taken place. It’s a buyer letting a seller know exactly what it is they need from them, and allows the seller to prepare the goods or services requested.
Invoices, on the other hand, are sent by sellers, and represent a clear description of what’s owed by the buyer after the goods or services have been rendered. These invoices will often contain specific payment terms designed to make payment simple and clear for the buyer. In other cases, an invoice with a balance of zero is sent to serve as an official record that payment has already been processed before the date of the invoice.
Invoices will sometimes interact with purchase orders directly. When a purchase order is sent and processed before a transaction, the number of that purchase order will often be referenced directly by the invoice. This helps connect invoices to purchase orders and makes transactions as clear as possible for both accounts payable and accounts receivable departments for the two businesses in question.
Think of it this way: a purchase order is how a buyer lets a seller know what they want from them, and an invoice is how a seller lets the buyer know how much they owe for what’s been given.
Tracking purchase orders is an important element of smart accounting, and helps businesses ensure that they’ve received the goods or services that they’ve ordered. Meanwhile, tracking purchase orders is essential for ensuring that a business doesn’t pay twice for the same goods or services.
While every business tracks purchase orders a little differently, there are some general best practices which companies should follow. First, it’s important to limit the amount of touch points on purchase order tracking where possible. The more people, departments, and points of transfer get involved with purchase order tracking, the more opportunities there are for mistakes or mishandling.
Meanwhile, transparency is also very important. The more clearly a company’s purchase order tracking process or system is, the more visibility they can have on how they’re spending money. Finance departments will be better able to analyze how money is being paid to vendors, and whether there are opportunities to become more efficient and eliminate waste.
When a company develops close personal relationships with vendors or partners, their process usually becomes slowly more lax, and purchase orders are one of the first things to go. They're often seen as unnecessary in situations where they have close relationships with their vendors, and can sometimes even have a reputation as being a nuisance.
This is also a mindset found often in small startups, where the purchasing process is straightforward and small-scale. But then the company begins to grow, and the bad habits they’ve established in a casual purchasing process begin to be a larger issue as they deal in larger scales and more complex purchasing needs.
Establishing a set, organized purchasing process that involves detailed and organized purchase orders is essential for long-term financial health and visibility in the accounting process. A purchase order is more than just a request for services or goods. It’s a legally binding document that provides an audit trail when necessary and provides a clear record of what has transpired when a company makes a request for goods or services.
So, what exactly goes on the average purchase order? While not all purchase orders are exactly the same or feature the same information, there are some general points you can expect to see or include on a purchase order. Here’s what should appear on the average purchase order you send a vendor or receive as a vendor yourself:
The product(s) or service(s) to be purchased
Specifics of brand names, SKUs, model numbers, etc.
Price per unit
Delivery date – when the order should be delivered
Delivery location – where the order should be delivered to
Billing address – where the seller should send the invoice to after delivery
Discounts – any discounts applied to the order per contract terms with the vendor
Want to make a purchase order management process simpler? Automate it. Paper-based systems for managing purchase orders and invoices are not only outdated, but they’re time-consuming and introduce more opportunities for errors. In a single purchase cycle, many companies will process as many as seven documents: purchase orders, requisitions, quotes, order acknowledgements, goods received notes, packing slips, invoices, and bills. Tracking all of these documents can be complicated, which is why automating the process to ensure clear and organized record keeping is essential.
Using purchase order or billing management software helps digitize an entire process for purchasing and other documents, tracking them in a single system that can also integrate fully with an existing accounting or finance platform. If you want to fully digitize past records, that can be completed simply too, through a straightforward process for uploading documents.
The content found here is for informational purposes only, and not for the purpose of providing advice, including but not limited to, financial, legal, or tax advice. Any opinion found here does not necessarily represent those of Bill.com.