How Does a Purchase Order Differ From an Invoice?

Every business transaction should include checks and balances for all parties. Customers want protection so that they receive exactly what they paid for and expect—while sellers want to know that they’re going to be fully compensated for their goods or services.

Among the paper trail of business contracts are 2 common documents: the purchase order and invoice. 

What are the differences between purchase orders and invoices? Do you need both to execute a business transaction? 

Let’s take a deeper dive into the nuances of a purchase order and how it differs from an invoice.

What Is the Purpose of a Purchase Order?

A purchase order (PO) is where a customer states clearly what they want from the company. The purchase order will provide clear details about what products or services will be completed, when they will be delivered, and how much they will cost. In essence, the purchase order is an overview of the business transaction.

Each purchase order comes with a purchase order number, typically provided by the vendor. This makes it easy for the vendor to track and manage orders across different vendors. The PO number also provides clarity if the customer submits several orders with the same company. 

While the customer issues a purchase order, both parties often work together to create it. There might be a sales meeting where the customer discusses their needs and the vendor reviews their product offerings. Through this process, both parties can move forward with a clear understanding of what the other wants. The purchase order seals the deal and provides the necessary signatures to move a project or fulfillment forward. 

Once a purchase order is submitted by the customer and signed by both parties, the vendor can work to complete the agreement. If there are any concerns about the product or delivery throughout the transaction, both parties can use the purchase order as a reference for their agreement. 

Which Comes First, a PO or an Invoice?

In a transaction, the purchase order comes before the invoice because it is issued before the work begins. An invoice is issued after the work is complete or when the customer agrees to pay for the goods or services. 

For example, a customer who calls a plumber will sign a purchase order for a new water heater. When the job is complete, the plumber will send an invoice to the customer for payment.

Invoices contain much of the same information as purchase orders. They’ll list out the goods or services purchased, the number of items bought, and the cost of each item. The invoice will end with a total amount owed and instructions for how to pay the balance. Invoices also come with deadlines for customers to pay the vendor, typically ranging from 30–90 days. 

Is a Purchase Order Proof of Payment?

A purchase order is not considered proof of payment for a transaction. While a purchase order can list the price of items and the expected delivery dates—and can even include deadlines for when the customer is expected to pay—it does not contain any proof that the customer did pay. In fact, in many agreements, customers won’t pay for goods or services until they’ve been completed or delivered. 

Invoices are also not proof of payment. They only show that a business requested payment, not that the customer completed the process. 

The only way to prove that a customer paid for their products or services is with a sales receipt. This proof will be issued when a business receives a check, cash, or credit payment on the goods or services. If the purchase order lists multiple payment deadlines (like a deposit at the start of the project and the remaining balance at the end), then a company will issue multiple sales receipts for each financial transaction. 

Purchase Orders and Invoices Keep Both Parties in Agreement

The invoice and purchase order format helps both vendors and customers stay on the same page throughout the sales process. If a customer has a question about an invoice, the vendor can turn to the purchase order that the customer agreed to. If the vendor fails to deliver the right products on time, the customer has protections in the form of a purchase order agreement. 

In some transactions, both parties might sign a purchase contract that dives into greater detail about the products and services offered. This is particularly true for large-scale or expensive projects. 

Purchase contracts can also cover company return policies and customer requirements—like timelines for providing feedback on the work or requesting changes. The protections make the business transaction run smoother and can protect both parties in the event of a disagreement. 

Create Purchase Orders and Invoices With Lendio’s Software

As you grow your business, your customers will expect purchase orders when they buy your products or services. You can easily create these with the Lendio app. You can also easily turn POs into invoices and accept payment from customers all in one place. Check out our software system to see if it’s right for you. Our services are intuitive—and free for small business owners to use.