To effectively manage your business, it’s important to know the difference between purchase orders and invoices, and when to use them. Purchase orders are generated by the company that will be receiving payment in exchange for the goods or services they provide, while invoices are generated by the company who will be receiving money in exchange for the goods or services they provide. If you’re still confused about how to use purchase orders and invoices, this step-by-step guide will clarify things.

Understanding Invoices

There are two basic types of invoices: purchase orders and sales invoices. A purchase order is essentially a customer request for goods or services they will pay for at a later date. It's not an invoice, but rather an instruction to your company. For example, if you were supplying flowers for a wedding, you might create a purchase order that asked your florist to provide five bouquets by May 23 with certain colors, styles, scents, etc. The florist would then confirm receipt of that purchase order so they knew what was coming their way. Meanwhile, you could also issue an invoice to your client stating what products or services were being provided, how much each one cost and when payment would be due.

Similarly, after delivering said products on time—maybe even with a few extra-special touches—you'd send another invoice to them requesting payment in full. An invoice must always be issued after any work has been done. In most cases, you'll only issue a purchase order once during a transaction process, whereas invoices can be sent multiple times as long as there is more work being done under that contract. Your business needs both purchase orders and invoices if it expects to receive payments from clients. If a client requires an official statement for tax purposes , use credit memos instead of sales receipts . Credit memos may not require signatures from those who receive them as opposed to receipts which do require signatures from those receiving those documents.

Understanding Purchase Orders

A purchase order (PO) is a written request for goods or services that you make on behalf of your business. When another company receives your PO, they'll know exactly what you need and will either send it to you or provide an invoice (more on that below). Since they're such critical documents, it's important that POs are accurate and easy-to-read. Here are some tips: Include all pertinent information in your purchase order, such as details on pricing, quantity ordered, delivery dates and shipping addresses. It should also include your billing address, phone number and contact person—along with details on how you'd like to be billed. If there are any specific terms attached to your purchase order, make sure those are included as well. That way there won't be any misunderstandings down the line.

Purchase orders have been around since at least 1,000 B.C., when people started trading goods over long distances, often for different currencies from their own. In order to make these transactions easier, traders began asking other merchants for receipts confirming what they’d sold or paid for.

CONCLUSION

Now that you’ve covered all of your bases, it’s time to formally start doing business. To get started, you need a solid understanding of how purchase orders and invoices work together; for many businesses, these two documents are essential. While each has its own specific purpose, they both serve as clear guidelines for transactions between buyers and sellers. The next time you have an opportunity to use either document in your business, check out our cheat sheet below for some quick pointers on when and where—as well as what format—you should be using them. If you aren’t already generating professional-looking templates yourself, there are several online invoice generator software tools available like Invoicera designed specifically with small businesses in mind.

SOURCE: Know the Difference between Invoice and Purchase Order (PO)