In the world of business, there is no room for informal agreements. Every transaction requires documentary confirmation. Sales orders, purchase orders, and invoices are three key documents you may encounter in the course of commercial relationships. Each of them includes a set of identical data, which can lead to confusion. Proper documentation not only ensures the efficiency of transactions but also minimizes risks for all parties involved.
In our article, we will explore the peculiarities of the purchase order, sales order, and invoice, helping you understand the difference between them. Additionally, we will discuss how automated documentation can streamline and expedite the procurement process.
- What Is a Purchase Order?
- What Is a Sales order?
- What Is Invoice?
- How Do Purchase Orders, Sales Orders, and Invoices Work Together?
- The Difference between a Sales Order, a Purchase Order, and an Invoice
- Purchase Order, Sales Order, and Invoice: Impact on Business Operations
- The Benefits of Electronic Document Management in Procurement
- Frequently Asked Questions
What Is a Purchase Order?
A Purchase Order (PO) is a commercial document that initiates the procurement process of goods or services by a buyer from a seller. At this stage, the selling company (buyer) generates a purchase order to formally request goods or services from the supplier (seller). It serves as a contractual document outlining all the specifics of the transaction. The purchase order contains information about the goods, their quantity, price, delivery terms, and other details necessary for completing the purchase.
The document serves as the starting point for establishing clear obligations and agreements between the parties. The buyer sends the purchase order to the seller, who, in turn, uses it as the basis for generating a sales order.
As the primary tool in the procurement process, a purchase order requires careful and systematic attention. And it all begins with its contents. Here are the key components contained in any purchase order:
Information about the customer and supplier
The first and fundamental component of a purchase order is a section containing data about the customer (buyer) and the supplier. This includes the full name of the organization, legal address, contact phone numbers, and email addresses. This information ensures the unequivocal identification of the transaction parties.
Description of goods or services
This component entails a detailed description of the goods or services being ordered. It includes specifications, models, quantities, units of measurement, and other technical data necessary for the correct fulfillment of the order.
Prices and payment terms
This section of the purchase order contains information about the prices of goods or services, as well as payment terms. It specifies amounts, taxes, applicable discounts, and payment methods. This information is crucial for establishing the financial commitments of the parties involved.
Delivery terms and conditions
Determining the delivery deadlines and location is also a crucial component of the purchase order. It specifies when and where the goods or services should be delivered. This allows the parties involved to have a clear understanding of the delivery timeline and location.
General terms and additional requirements
An additional section may include general terms of the transaction as well as specific requirements imposed by the customer or supplier. These conditions may relate to quality standards, packaging, certification, and documentation, among others.
What Is a Sales order?
A Sales Order (SO) is an official document issued by a supplier to confirm a customer’s request to purchase specific goods or services. It enables the seller to gain a clear understanding of the customer’s needs and confirm the sales conditions.
The main purpose of a sales order is to document and formalize the customer’s intention to make a purchase. It serves as a bridge between the agreement stage and the actual fulfillment of the order.
All agreed-upon conditions are outlined in the sales order. When the customer accepts the sales order, the supplier, in turn, commits to shipping the ordered goods according to the agreed-upon terms and timelines.
A typical sales order includes the same key components as a purchase order. It contains customer information, product or service details, prices, payment terms, and delivery instructions. It serves as a guarantee that both parties agree to the specifics of the order.
What Is Invoice?
Invoice is the final stage of a commercial transaction. It is prepared by the supplier and sent to the buyer after the delivery of goods or services. An invoice serves as an official request for payment and contains detailed information about the completed transaction. Its purpose is:
Financial record-keeping
The invoice serves as a fundamental document in financial documentation for both the supplier and the buyer. It acts as a report of the completed transaction, aiding in maintaining accurate accounting and financial records.
Summary of completed transaction
The invoice provides a detailed description of the transaction, including the total amount due. It encompasses the cost of goods or services, any applicable taxes, as well as a breakdown of individual items or services.
Confirmation of payment terms
As in the previous steps, the invoice confirms the payment terms, indicates the payment date and acceptable payment methods. This clarity ensures smooth and efficient financial transactions.
After the buyer company pays the invoice, the commercial transaction is completed. Both parties fulfill their obligations as outlined in the initial purchase order and sales order.
How Do Purchase Orders, Sales Orders, and Invoices Work Together?
To understand the differences between a purchase order, a sales order, and an invoice, it is necessary to delve into all the intricacies of document movement in commercial business operations. Below, we have provided a step-by-step overview of how companies generate and exchange documents during the procurement process.
- Before ordering goods or services, a company generates a purchase order. It clearly defines the individual or multiple purchases from the supplier.
- This purchase order is transmitted to the supplier via email or through modern digital communication channels.
- The supplier receives the purchase order and enters it into their system. The system checks the availability of goods in stock and generates a sales order to confirm the delivery.
- Then the sales order is sent to the buyer. It confirms that the supplier has received and approved the purchase order. If the goods are not available in stock, they may be marked as backordered with an expected delivery date.
- The buyer reviews the details of the sales order, comparing them with the terms of the purchase order, and identifies any potential discrepancies.
- Items marked as backorders are processed as separate sales orders. However, they are attached to the overall sales order.
- Upon receiving the goods, the buyer is provided with a delivery note listing the items included in the sales order. The buyer enters it into their system and sends confirmation to the supplier that the delivery has been accepted.
- The supplier generates an invoice and sends it to the buyer. The buyer’s system compares the invoice with the purchase order and the received delivery note.
- Once the invoice is paid, the transaction is considered complete. All information is stored in the system of both the buyer and the supplier. If needed, they can quickly and easily review all order data.
The Difference between a Sales Order, a Purchase Order, and an Invoice
As we have already determined, the purchase order, sales order, and invoice represent three key documents used in commercial transactions. Each of them serves its own functions in the procurement process.
| Element | Purchase order | Sales order | Invoice |
| Who prepares | Buyer | Seller (supplier) | Seller (supplier) |
| Who accepts | Seller (supplier) | Buyer | Buyer |
| Content | Purchase request | Purchase confirmation | Shipping confirmation, payment request |
| Goal | Purchase of goods | Preparation for delivery | Payment for delivered goods |
| When created | Before delivery | Before delivery | After delivery |
Initiator
The initiator of the purchase order is the customer themselves. The buyer expresses their intention to purchase specific goods or services by providing the seller with specific requirements and order details.
In contrast, the sales order is initiated by the seller. It serves as confirmation of the sale and documents the key order details provided by the buyer. The seller confirms readiness to fulfill the order and complete the transaction. Upon completion of the transaction, they generate an invoice to request payment from the buyer for the delivered goods or services.
Purpose
The purpose of a purchase order is to formalize the buyer’s request and establish a contractual agreement between the parties. The buyer expresses their needs, defines the terms of the deal, and provides information necessary for the successful fulfillment of the order.
On the other hand, the purpose of a sales order is to confirm the sale, finalize order details, and provide both parties with a document for further transactions. The seller confirms readiness to deliver goods in accordance with the terms specified by the buyer.
The focus of an invoice shifts towards providing financial information. It finalizes the transaction by serving as a request for payment for the delivered goods or services.
Sequence
The purchase order typically precedes the sales order. The buyer expresses their intention to purchase goods, and the seller responds to this request with a sales order, confirming readiness for the transaction. The invoice is generated after the delivery of goods or services, providing an overview of the transaction for payment processing.
Content
The purchase order contains a detailed breakdown of the buyer’s requirements, including specific items, quantities, prices, and delivery terms. The document focuses on the customer’s request and serves as the basis for the contract between the parties.
The sales order includes the confirmation of order details, expression of readiness to fulfill the transaction, and the seller’s commitments to the buyer. It emphasizes the agreement of terms and solidifies the seller’s obligations.
The invoice provides a detailed breakdown of costs, taxes, and payment terms.
Purchase Order, Sales Order, and Invoice: Impact on Business Operations
Improperly drafted or incomplete orders and invoice errors can lead to:
- Delays in order processing;
- Errors in deliveries;
- Issues with payment reconciliation.
Therefore, it is crucial to ensure accuracy and correctness of documentation at all stages of commercial relationships. If you are dealing with suppliers, you should be able to generate purchase orders. They enable your company to plan its activities more accurately and avoid unforeseen supply problems.
Purchase orders are the foundation for efficient inventory management, supply chain optimization, and prevention of potential delays. With them, your company can promptly respond to changes in demand and maintain stability in the supply of goods or services.
Furthermore, purchase orders contribute to establishing transparent relationships with suppliers. Preparing orders in accordance with the expectations and requirements of both parties lays the groundwork for mutual understanding and collaboration. You will also be able to prevent potential disputes or disagreements, as the terms of the transaction are clearly defined from the outset.
If your company is a supplier, you often have to deal with sales orders and invoices. Sales orders are a key tool for effectively managing your sales and timely fulfilling customer orders. They provide the basis for production planning and inventory management. This is important if you want to ensure that your customers receive the necessary goods on time.
Invoices, on the other hand, ensure the financial stability of your company. Properly drafted and timely issued invoices help maintain payment discipline from customers. They serve as evidence that customers have received goods or services from the company and are committed to paying for them. This is important for recording company revenues and controlling customer obligations to the company.
The Benefits of Electronic Document Management in Procurement
Many companies are increasingly turning to automation and the use of digital solutions to improve their business processes, including document management. This allows them to increase the efficiency of their operations, reduce the time and resources spent on document processing, and improve data accuracy.
Purchase order management
One of the key areas where automation is highly beneficial is in the management of purchase orders. An automated system streamlines and accelerates the entire process, from order creation to fulfillment and shipment. The system automatically tracks the status of orders as determined by the supplier and provides information on their execution. This enables prompt responses to changes in the delivery process and helps eliminate potential delays.
Sales order management
One of the advantages of automating sales order management is the ability to automatically determine the availability of products in stock. The system automatically checks the availability of the product and alerts about its absence or low stock levels. This enables the company to react promptly and offer alternative options to customers.
Invoice management
Automating invoice management also offers its advantages. The system automatically generates invoices based on information from sales orders, thereby avoiding errors and reducing the time spent on their creation. Furthermore, automation enables companies to promptly track the payment status of invoices and simplifies the process of interacting with customers in case of overdue payments.
Frequently Asked Questions
1. What is the difference between a purchase order and a sales order?
A purchase order is generated by the buyer and sent to the supplier to request the delivery of goods or services. A sales order, on the other hand, is a confirmation from the supplier containing details of the goods ready for delivery, as agreed upon with the terms of the purchase order.
2. What is a blanket sales order?
A blanket sales order is a long-term agreement between a customer and a supplier, where the customer purchases large volumes of goods. The supplier then delivers these goods in installments over a predetermined period of time.
3. What is the difference between a purchase order and a purchase requisition?
A purchase order is a legal document expressing a specific desire by a client to receive goods or services. A Purchase Requisition, on the other hand, is an internal document, not always formalized, that precedes the actual Purchase Order and requests permission to procure goods or services.
4. Are the waybill and the invoice the same document?
The waybill and the invoice represent two different documents in commercial transactions. The waybill typically serves to confirm the delivery of goods, while the invoice is issued by the supplier to demand payment from the buyer.
5. Can the invoice be considered as proof of payment?
The invoice itself is not proof of payment. It serves as a document issued by the supplier to demand payment from the buyer. The fact of payment is confirmed through appropriate accounting records and documents of financial transactions between the parties.
6. How does an invoice differ from a sales order?
The invoice and the sales order serve different functions in the process of commercial transactions. A sales order confirms the readiness to deliver goods, while an invoice is issued after delivery to demand payment from the buyer.
