What’s the difference between a purchase order and an invoice? Are they interchangeable, or do you need both? And what role does each play in the procurement process?
These are all good questions and ones that, thankfully, have quite straightforward answers.
In this article, we’re going to provide answers to all of them. Actually, we’re going to go a little deeper than that.
We’ll highlight the key differences between purchase orders and invoices, detail what you’ll find on each, explain how these two important procurement documents work in conjunction, and provide practical tips for managing them in your organization.
Purchase order vs. invoice: A two-minute overview
A purchase order is a document that the purchaser sends to the seller, requesting goods or services and indicating quantities, types, and any previously agreed-upon pricing.
An invoice is a document that the seller sends to the purchaser once the goods or services have been delivered, requesting payment for said goods or services.
The purchase order also included a purchase order number, which is generally included by the seller on the invoice, making invoicing matching possible for the purchaser’s accounts payable team.
What is a purchase order?
A purchase order is a formal document used to request goods or services from a supplier.
When you want to buy something from one of your vendors, you’ll use a purchase order to formally request it.
Think of it as the formal version of a message that says, “Hey, I want to buy this. Can you send it to me and bill me for it, please?”
What is the purpose of a purchase order?
The purpose of a purchase order is to stipulate in clear detail what it is that you wish to purchase from a given vendor?
While you can (and often will) communicate this over phone, email, or instant messaging, a purchase order makes the request more formal.
More importantly, it creates a (usually digital) paper trail so you have proof of what was ordered, which you can then use to confirm that what was delivered matches correctly or bring up any errors with the supplier.
The purchase order also includes a unique number — known as the purchase order number — so that you can look it up in your purchase order system.
The vendor will also include this number on the invoice they send later, so you can easily link up the two documents and ensure that they match — in other words, so you can check that you are only paying for what you ordered.
What can you find on a purchase order?
Here’s what you’ll find on the typical purchase order document:
- A purchase order number
- Buyer contact information
- Supplier contact information
- The items or services you want to order
- The quantity of each item you wish to order
- Prices for each item (if they have already been agreed)
- The date of the purchase order
- Terms of payment (if previously agreed)
- Expected delivery dates
- Any other relevant reference numbers
What is an invoice?
An invoice is a formal document used to request payment for goods or services provided to a customer.
When you’ve purchased and received something from one of your vendors, you’ll receive an invoice with instructions on how to pay for it, along with terms regarding when they payment is due.
Think of it as the formal version of a message that says, “Hey, I sent you that thing you asked for. Can you please pay me now?”
What is the purpose of an invoice?
The purpose of an invoice is to formally request payment from a customer.
It also includes bank account details and payment terms (such as the payment being due on the 20th of the month) so customers know exactly when and how to pay.
What can you find on an invoice?
Here’s what you’ll find on the typical invoice:
- Invoice number
- Date of the invoice
- Purchase order number
- Buyer contact information
- Supplier contact information
- Description of goods or services provided
- Unit and total prices
- Applicable taxes
- Applicable discounts
- Invoice due date
- Payment terms
- Payment details (such as a bank account number)
- Shipping and handling fees
- Any other relevant reference numbers
Purchase order and invoices: How they work in practice
It should be clear by now, then, that purchase orders and invoices are two distinct documents that serve different purposes.
That said, the two are intimately connected and are both used within the same purchase-sale process.
Here’s an overview of what that looks like.
1. Purchase order created and sent
The first step in this process occurs when someone in your organization wants to make a purchase.
To do this, they’ll need to raise a purchase order.
Depending on your own procurement policies, it may be necessary for the person who wishes to purchase goods or services to seek approval from leadership or the procurement team, which they’ll usually do using a purchase requisition.
Once this request is approved, they can generate the purchase order itself.
This is then sent to the vendor as the formal request to purchase. Though there might have been a previous conversation with the supplier — such as to negotiate pricing or confirm availability — the purchase order formalized and solidified the request.
2. Goods or services delivered
Next, the vendor provides the goods or services as outlined in the purchase order.
This stage might involve some quality checks on your end, such as when receiving physical components required for production, which you’d want to confirm are up to standard before adding them to your inventory.
3. Invoice received
With the goods or services having been received, your supplier will send over the invoice.
Your accounts payable department will typically receive this via email, though some vendors still go the old route and send paper invoices, and others might be able to directly integrate with your AP system using an e-invoice.
4. Invoice validated and reconciled with purchase order
This is one of the most important steps in the accounts payable process:
Here, you’re going to match the invoice against other documents, most notably the purchase order, to confirm you’re being charged for what you’ve ordered.
In some cases (such as when implementing three-way matching), the invoice may also be matched against a goods received note, confirming not only that you’ve been charged for what you ordered, but that what you received aligns as well.
Implementing at least some form of invoice matching process, even if it's a simple two-way match against a purchase order, is critical to ensure accuracy in billing and payment processes, and to prevent errors or discrepancies.
5. Invoice paid
The final step in the process is to send payment for the goods or services.
The invoice you received from your vendor should outline payment terms (such as when the invoice is due and any early payment discounts) as well as provide details for sending payment.
Best practices for managing purchase orders and invoices
Now that you know a bit more about how invoices and purchase orders differ, let’s take a quick look at how you can better manage and utilize these two documents in practice.
Establish and distribute clear policies
Effective policies that are clearly documented and easily accessible are critical for ensuring consistency across your AP team, as well as for maintaining compliance with internal expectations.
You might, for example, design a policy for creating purchase orders, which outlines:
- Who has the authority to create purchase orders
- When special permission needs to be requested
- Who can provide that approval
- What specific details should be included on a purchase order
Implement three-way matching
Any kind of invoice matching process is better than none, but the three-way match is generally the best balance between security and agility.
While two-way matching checks invoices against purchase orders (confirming that what you’re being charged for is the same as what you ordered), three-way matching introduces an additional match against a goods receipt.
This helps you confirm that you only pay for what you received and gives you an opportunity to rectify invoices in case an order arrives incorrectly.
In some cases (such as when ordering fresh produce, which has a high propensity to arrive in poor condition), it might be wise to go a step further and use four-way matching. This requires a quality check to be completed for the goods received, and matched up against the invoice, purchase order, and goods receipt.
Unless you find that a quality inspection is a critical step, it's generally better to stick with three-way matching to speed up the invoice approval and payment process (getting your vendors paid faster).
Leverage modern automation tools
Our final tip: take advantage of the powerful tools you have at your disposal to cut away manual work and speed up invoice processing.
Here are a few of the ways financial automation can support:
- Automatically converting purchase requisitions to purchase order
- Automated matching of purchase orders and invoices
- Automatic payment of correctly matched invoices to approved vendors
- Automated notifications when there is a discrepancy between invoices, purchase orders, and goods received notes
Make managing purchase orders and invoices pain-free
Purchase orders and invoices are two important and distinct documents you’ll see a lot during the accounts payable process.
In fact, every time your company wishes to purchase goods or services from a supplier, you’ll need to raise a purchase order, and will later receive and invoice from that vendor.
So, you’re going to need a good system for managing all of those documents.
BILL, our financial operations platform, can help you:
- Create and store purchase orders
- Receive invoices and manage supplier payments
- Automatically match invoices against PO numbers
- Access business credit
- Create forecasts and manage cash flow
Starting using BILL to manage invoices and purchase orders today.
