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Procurement 101
Reading time:
10 minute read
Written by
Majdi Sleimen
Purchase orders. Sales orders. Invoices... What a complicated mess of similar business terms!
Outside of the business to business (B2B) world, it’s enough to make anyone’s head spin.
A simple definition: A purchase order is created by a business to communicate a list of goods or services they’d like to purchase from a supplier (a supplier, also sometimes called a vendor, can be a business or anyone selling goods or services). A sales order is created by a supplier to confirm that they can supply the goods and services requested for purchase by the buying party.
It confirms that the supplier has reviewed and accepted the terms and details of the purchase order - including prices, quantities, payment methods, and the ability to deliver to the specified addresses on time. An invoice is created by a business to request a payment that’s due from someone who purchased goods or services from them. An example of how the document is used to purchase goods. Imagine a purchase order as a formal grocery list that you’d send to a grocery store to indicate what food items you intended to buy from them.
The grocery store would send you a sales order to confirm your address, your method of payment, how many food items you’re buying, and how much the items cost after reviewing and confirming the details of your purchase order. The grocery store would send you an invoice after delivering the food to your house to indicate how much you owe for the food items you bought and to initiate a request for your payment. An example of how the document is used to purchase services. Don’t forget that a purchase order can be used for services too! If you wanted someone to paint your house, you could (but in real life, likely wouldn't unless you were a business) send them a purchase order to communicate your specifications for the job.
The painting service would confirm that they were willing to provide their services at the specified cost per hour, which parts of the house need to be painted, where the house is located, and that the service can be delivered within the time frame you specified. The painting service would send you an invoice to request payment based on their hourly rates, and other potential service charges related to their particular business model (perhaps travel costs if the location was out of town, overtime hours to complete the job faster, etc.).
What else is the document sometimes called? Purchase orders are often abbreviated as “PO”. Purchase orders are not the same as purchase requisitions. Read about the difference. Sales orders are often abbreviated as “SO”.
The process used for managing sales orders is referred to as “order management” - not to be confused with “purchase order management” which is a different process! Don’t get confused! Invoices are sometimes also referred to as “sales invoices”. Where is this document used during a purchasing process?
Purchase orders are used by buyers to initiate the purchasing process with a supplier. Sales orders are sent by suppliers to buyers after receiving a purchase order from the buyer - verifying details and the confirmation of the purchase. Invoices are sent by supplier to request a payment from a buying party once goods or services have been fully delivered by the supplier.
Both purchase orders and sales orders can look very similar to one another. The purchase order will list details about the purchasing arrangement and the sales order will relist those details to verify the purchasing agreement. One of the major differences in appearance will be the branding that the supplier uses on their sales order. Here’s an example of what a purchase order with sample data looks like:
The invoice will look different from the purchase order, because it's being sent from a supplier. Similar to a sales order, the invoice will be branded with the supplier's logo, and will include the buyer's PO number on the invoice. Using the sampled details from the purchase order above, here's what an example of what a matching invoice (or "sales invoice") would look like for that order:
Purchase orders, invoices, and sales orders each have an important role to play in the purchase to pay (P2P) process. Understanding the function of each document can save a lot of confusion during business transactions. If you're interested in clarifying more terms to avoid confusion before ordering business to business (B2B), here's some further reading you may find helpful:
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