In 2021, the U.S. Automated Clearing House (ACH) payments network alone processed 5.3 billion business-to-business transactions with a net dollar value of $50 trillion. Purchase orders and invoices are the documents that fuel this incredible volume of business. But businesses also know that preparing these documents and getting paid remains a slow and error-prone process.
What if we could optimize these processes? A steep increase in global business is for the taking if we could do that. So why aren’t we, and what makes purchase orders and invoices so complex and time-consuming? What are the solutions out there that can speed them up? In this deep dive on purchase orders vs. invoices, you’ll learn all that and more.
What Is a Purchase Order?
once a vendor accepts the purchase order it becomes a legally binding contract
A purchase order (PO) lists the goods or services that a company wishes to buy from a selected vendor or service provider.
How Is a Purchase Order Used in the Procurement Process?
A PO is a critical document in the purchasing process of a business. So let’s start with an overview of the process.
It starts when a department — like manufacturing, engineering, operations, sales, HR, or administration — identifies a need for some goods or services.
They prepare a purchase requisition with a list of goods or services they need along with criteria like quantities and quality. The requisition is sent to the purchasing department.
The purchasing department maintains a list of vendors, their details, and their business transactions in a vendor master list or master suppliers list. Based on the details in the requisition, they select a suitable vendor, call for a request for proposals, or put out a tender.
Once a vendor is selected, the purchasing department negotiates terms, dates, and conditions with the vendor’s sales team for sourcing the required goods and services.
With the details fleshed out, the purchasing department creates the PO. It includes requirements, negotiated prices, dates, quantities, and quality criteria. It sends the PO to the client manager of the vendor.
Some large companies don’t send the PO but just notify the vendor to log into their procurement portal, examine the PO, and either accept it with an e-signature or reject it.
What’s in a Purchase Order?
The illustration shows the order details that go into a typical purchase order. It includes:
A purchase order number, or PO number — a unique number or identifier to cross-reference the order between documents
Buyer’s billing address and contact details
Vendor contact information
Date of the order and expected delivery date
Line items listing the goods and services, their quantities, and quality criteria
The negotiated payment schedule, payment terms, and any other financial terms like discounts
The buyer’s receiving department
A specification identifier (in some industries)
The authorizing employee’s name and signature
What Is an Invoice?
An invoice is a payment request sent by a vendor after supplying the goods or fulfilling the services requested in a purchase order.
To be precise, that’s the definition of a sales invoice, but it is the most popular type of invoice used. As you’ll see later, there are other types of invoices and many types of sales invoices.
How an Invoice Is Used in the Procurement Process
Let’s see a typical invoice process for a vendor. On receiving a PO, the vendor’s client manager uploads it to the centralized system and initiates order fulfillment. Depending on the company, this may involve manufacturing, engineering, operations, warehousing, or some other departments.
The vendor delivers the requested goods and services to the buyer. In some industries, the buyer examines quantities and quality and issues goods-received notes or acceptance reports.
Next, the receivables team in the vendor’s accounting department prepares the invoice. The amounts there are determined based on multiple factors like negotiated terms in the PO, contract terms, recurring agreements, market fluctuations, inflation, depreciation, number of rejected goods, discounts, and so on.
This invoice is then sent to the buyer’s accounts payable team to request payment. The latter examines the invoice, verifies the delivery of goods, and matches the details in the invoice with the PO and other documents.
If everything checks out, it initiates the payment process to pay the vendor.
What Information Goes Into an Invoice?
A typical invoice includes the following information:
Invoice number that is a unique identifier
Vendor name and contact information
The line items with the names of the goods and services, the quantity of goods (counts, weights, or time), and the amounts
PO number of the order being fulfilled
Total amount due
Applicable local, state, federal, and international taxes
A payment schedule and other terms of payment like late payment fees
A due date
Name and signature of the authorized employee
Why Do Businesses Use Purchase Orders?
Purchase orders may seem like pointless formalities. Why don’t businesses just email or call their vendor contacts and be done with it? In fact, the details of purchases are fleshed out by communicating and negotiating directly. But once they have agreed on the details, they get them in writing, on an official document like a PO, to set clear expectations for both parties.
Some other important benefits of using POs are:
Track expenses and cash flows: Every purchase affects a company’s expenses and cash flows. By using POs and filing them centrally, CFOs and finance departments can keep a close watch on the business’ overall finances.
Streamlines procurement: Sharing POs between the purchasing, requesting, operations, and accounting teams reduces miscommunication and improves efficiency.
Supports inventory management: Modern supply chains can be complex, spanning multiple locations and departments. So accurately tracking inventory is difficult. Purchase orders act as a second source of information for tracking inventory accurately and finding discrepancies.
Legally binding agreements: Courts and arbitrators treat a purchase order as legally binding once a vendor accepts, acknowledges, and signs it. But if a vendor rejects it, it’s not legally binding. Plus, a PO is not as legally binding as a contract, but a purchase order placed in the scope of a wider contract should follow all its terms.
Supports auditing: POs are critical financial documents examined in company audits.
Why Do Businesses Use Invoices?
Vendors, as well as buyers, benefit from using invoices as formal requests for payments:
They enable vendors to get paid for the goods and services they deliver.
They help with the company’s budgeting and cash flow projections.
They enable accounting departments to track payments and revenues.
They provide legal protection because they are legally binding.
They are another essential part of auditing.
Types of Purchase Orders
The PO described so far is just one type. Some important types of POs include:
Standard PO: A standard PO is typically used for one-time and short-term purchases.
Contract PO: A contract PO just negotiates general terms and conditions for the long-term without specifying any goods or services. Future POs for specific goods are then issued in the scope of the contract PO and its terms.
Blanket PO: A blanket PO is used for goods whose necessity is predicted but quantities are unknown and determined only later.
Planned PO: A planned PO is used for goods whose necessity is anticipated but the exact dates cannot be predicted. They are useful for goods that are bought repeatedly or restocked.
As you can see, POs in the real world are more complex than the simple PO in the illustration above.
Types of Invoices
Just like POs, invoices in the real world can be complex. Some types of invoices include:
Sales invoice: This is the type we’ve talked about so far and the most popular too.
Purchase invoice: A purchase invoice is just the term used by the purchaser’s accounting department.
Summary invoice: A summary invoice aggregates multiple invoices when fulfilling a large number of purchase orders or a PO with a large number of small goods. They’re used if the purchaser does not want a detailed itemized list, just a summary amount.
Recurring invoice: A recurring invoice is used when invoicing the client regularly for the same goods or services every month.
Purchase Order vs. Invoice — Some More Key Differences
You’ve seen some important differences in contents and benefits. Let’s see some other key differences between them.
1. Who Issues or Receives Purchase Orders?
The buyer issues a PO to the vendor. More specifically, the buyer’s purchasing or procurement department issues it.
On the vendor’s side, the client manager who handles that buyer’s account receives it.
2. Who Issues or Receives Invoices?
The vendor sends an invoice to the buyer. The department that prepares an invoice depends on the particular industry and company. It could be any one of sales, logistics, fulfillment, operations, warehouse, engineering, or production.
The vendor’s accounts receivable department then adds financial terms to the invoice and sends it to the buyer’s accounts payable department.
3. Do Purchase Orders and Invoices Depend on One Another?
A PO is a standalone agreement that’s issued when the buyer needs some goods or services. In contrast, an invoice is always associated with a purchase order and can’t be issued independently.
Similarities Between Purchase Orders and Invoices
You have seen the many differences between a PO and an invoice, but they are also similar in some aspects:
Both are legally binding documents.
Both are financial documents heavily used by accounting departments.
Both are necessary for invoice-matching workflows.
They’re helpful to other departments to streamline orders and inventory management.
Both help with budgeting by tracking revenues, expenses, and cash flows.
Both are stored in centralized accounting systems like enterprise resource planning systems and financial software.
Both are essential for company audits.
In some industries and countries, both are still printed or faxed on physical paper.
Both can be processed using manual labor, semi-automated software, or state-of-the-art fully automated smart systems. The preferred approach changes by industry, company, and culture.
Next, we’ll explore some interesting aspects of the manual and automated processing of these documents.
How Are Purchase Orders and Invoices Processed Manually?
Accountants, as well as employees from purchasing or sales, have been manually processing these documents for decades. They still use computers here and there but not for most tasks. Instead, they do many tiresome tasks manually. This is especially prevalent in small businesses. For example:
They transfer data from invoices manually to spreadsheets or accounting software.
They check for both missing and unnecessary line items.
They check for missing data, invalid quantities or amounts, typos, and similar mistakes.
They try to find evidence of fraudulent transactions.
Senior accountants then double-check everything.
What Are Some Drawbacks of Processing POs and Invoices Manually?
You have already seen some of the real-world complexities that accountants have to deal with — multiple types of purchase orders and invoices, a variety of document layouts and data formats, and so on. Combine them with transferring and processing data manually, and you face some severe drawbacks:
Time-consuming: Each document takes hours for checking and double-checking.
Error-prone: The entire process is highly susceptible to data entry errors, misinterpretations, and similar human errors.
Expensive: The labor and hiring costs add up to make it a very expensive approach.
Affects business relationships: Due to the slow speed of processing, vendors may be unable to start and finish order fulfillment within the agreed time. Buyers may not finish reconciling invoices and sending payments in time. This leads to late payments, penalties, deductions, and legal disputes.
Semi-Automated Processing of Purchase Orders and Invoices
Most accounting departments currently use a mix of manual and semi-automated approaches. For example, to solve the problem of different document layouts, some systems have features like document templates. Accountants can create purchase order templates and invoice templates for each unique document layout. The software then extracts data from all matching documents without any manual labor.
However, this approach also has drawbacks:
Creating and maintaining a library of templates is not easy.
It can’t handle a large number of layouts.
It doesn’t have a deeper, semantic understanding of the data it sees. This prevents its use for later tasks like invoice matching and fraud detection.
It makes mistakes if there are even small changes in document layouts.
Width.ai’s Fully Automated Systems for PO and Invoice Processing
To avoid all these drawbacks, Width.ai has evolved fully automated processing systems for purchase orders and invoices. Unlike traditional and semi-automated approaches, our deep learning pipeline allows you to process these documents with no human in the loop required.
For example, when you see a PO or invoice with some items and amounts in a roughly tabular layout, you intuitively know you’re looking at a list of goods or services. You don’t need to see every variant of an invoice or memorize their coordinates to infer this. Our AI-based data capture systems work exactly like that — they have learned to understand financial documents semantically and can identify the data in any document.
Just a few of the many benefits of full automation include:
Handle any document layout: You can throw any PO or invoice with any layout and obtain the data in seconds.
High accuracy: The data extraction is very accurate with multiline understanding, typo tolerance, and no false positives.
Cost savings: You end up saving a lot of money because of less need for manual labor and reliable fraud detection.
Deep understanding of the data: Deep semantic understanding of the data enables our systems for complex tasks like 3-way invoice matching, fraud detection across time, and real-time budgeting.
Improve business relationships: Fast extraction and processing help with on-time payments and deliveries. The system supports features like payment reminders for recurring invoices.
Purchase Order vs. Invoice — Width.ai’s Perspective
In this article, you got a comprehensive introduction to the real-world complexities of financial documents like purchase orders and invoices. Though we didn’t mention them, other documents like goods-received notes and cash memos are also extensively used by accounting departments.
Our AI-based, fully automated document processing systems understand all these and much more just like experienced accountants do. Contact us for a demo!
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