Tax & admin 21 June 2017

The difference between a purchase order and an invoice

Purchase orders and an invoices perform different functions

Here, head of the Ormsby Street cash flow platform Rob Drury looks closely at the difference between a purchase order and an invoice, clarifying things once and for all for small business owners.

Writing for Business Advice a short while ago, Orsmby Street director Martin Campbell took a look at what a purchase order (PO) number was.

He described how a purchase order outlines to a vendor or supplier exactly what the purchaser needs. It is a document prepared by the buyer and which includes a “PO number”, which should be a unique reference that enables the matching of shipments with purchases.

Some would ask: “Isn’t this just like an invoice?” to which the answer is that it’s similar, but they perform different functions.

How are purchase orders and invoices and the same?

Both invoices and purchase orders cover what is being bought by one party from the other, including things like descriptions of the goods or service, the quantity, and the pricing.

Both invoices and purchase orders show when the goods or service is due for delivery, and also how and when payment is going to be made. This makes it very clear to both parties who’s responsible for what in an arrangement.

What is the difference between a purchase order and an invoice?

There is however an important difference between a purchase order and an invoice. For a start, purchase orders are generated by the buyer, and invoices are generated by the seller.

Through the purchase order, the buyer is clearly stating that this is what they want and what they’re going to pay for it, whilst the seller is saying that you’ve purchased these items and this is what and how you should pay for them.

Legally, we’re looking at the difference between an offer to purchase versus a confirmation of sale, and if you think of them in online shopping terms, the purchase orders are the shopping basket (this is what I’m going to buy and what it costs) and the invoice as the checkout page (this is what you need to pay and how you need to pay it).

Whilst many businesses do not use purchase orders, the invoice carries a more formal role in business administration, and includes some required content, such as VAT numbers.

As far as the seller is concerned, the purchase order number is simply a request to buy from them, whereas for the buyer it has purposes beyond a purchase request.

It allows the buyer to track future expenditure, ensure they aren’t over ordering, and address future cash flow management issues.

As far as the buyer is concerned, the invoice is something that needs paying, whereas for the seller the invoice carries with it an intrinsic value even before it is paid.

It’s an asset that appears on the balance sheet, and it’s something they can trade, in order to receive funds sooner rather than later through things like invoice financing.

This isn’t the only confusion when it comes to the difference between a purchase order and an invoice

In our business, we have customers paying their subscriptions on a monthly basis for the upcoming month of access to our software. They do this through recurring payments from their bank account, credit or debit card, and once a month our systems run and attempt to take the payments.

For all successful payments we generate a VAT receipt, however we are repeatedly asked for a VAT invoice.

Here, the difference between receipts and an invoice is that invoices are issued before payment stating what needs to be paid and when, whilst receipts are issued after payment, acknowledging receipt of the payment.

Robert Drury is head of product at small business cash flow platform Ormsby Street.

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