Strong AP and AR departments are essential to your business, regardless of your size and industry. Unfortunately, there are a lot of challenges that come with running them, especially with manual, time-consuming processes. Some of the issues include data entry mistakes, approval bottlenecks, and POs and invoices arriving in varying emails.
To run a successful AP and AR department, you must have a sound understanding of purchase orders and invoices. Below, we’ll take a closer look at their differences and similarities and why they’re important to your business.
TABLE OF CONTENTS
- What is a Purchase Order?
- What is an Invoice?
- The Key Differences Between POs and Invoices
- Key Similarities Between Purchase Orders and Invoices
- Why Your Company Should Use Both POs and Invoices
- Why Your Company Should Automate Your PO and Invoice Processes
What is a Purchase Order?
A purchase order (PO) is a legal document a buyer sends to a seller, documenting their agreement to pay them for specific products or services that will be delivered in the future. It clearly outlines what the buyer intends to purchase and the quantity they expect to receive.
What Information Does a PO Contain?
While POs can vary based on type and company, they often contain the following details.
- Purchase order number
- Company billing address
- Products or services purchased
- Quantity of item purchased
- Brand name, model or SKU numbers
- Price per unit
- Delivery date
- Delivery location
- Agreed upon payment terms
Why Are Purchase Orders Important?
Whether you’re a small or large business, there are many benefits in using POs, the main one being full transparency within your procurement process. Let’s delve into additional reasons why POs are paramount to a successful AP and AR department:
SETS CLEAR EXPECTATIONS
With a purchase order, everyone is on the same page. The buyer knows which products or services they’ll be receiving and how much they are paying, while a vendor or supplier understands what they’ll be delivering and when.
HELPS AVOID DUPLICATE ORDERS
POs can be invaluable regardless of how large or small your company is. Your purchasing department will find it easier to keep track of what’s been ordered, so they can avoid accidentally making multiple purchases for the same items.
PREVENTS COST INCREASES
Purchase orders put agreed-upon prices in writing. This makes it difficult for vendors and suppliers to increase rates unexpectedly.
Without clear inventory visibility, issues such as stockouts may arise. With a PO system, you can figure out how much stock you should keep on hand and when it’s time to replenish. Ultimately, this helps your team streamline your inventory management.
HELPS WITH BUDGETING
Since purchase orders give a clear view of what, when, and from whom you’re buying, they can offer insight into spending patterns. This can lead to more accurate budget planning and even help your business save money.
HELPS WITH AUDIT TRAILS
A purchase order can strengthen your audit trails, allowing you to remain compliant, understand your business performance, and troubleshoot future financial questions or issues.
ALWAYS LEGALLY BINDING
Purchase orders provide your business with a legal, binding record of the products and services ordered, as well as their prices. If the vendor delivers the wrong item or charges the incorrect amount, the purchase order can resolve this issue. If either party pursues legal action, POs are legally binding and will hold up in court.
To remain efficient, productive, and profitable in today’s competitive marketplace, purchase orders are no longer an option; they’re a necessity.
Why Are Invoices Important?
At the basic level, businesses need to create invoices so that they can get paid, but also so that they can track sales and manage their finances. Let’s review more reasons why the invoice is a key component of the purchasing process.
PROVIDES TRANSPARENCY INTO SPENDING
Invoices will show how much money your company is spending and exactly where it’s going. This can allow you to identify areas for reducing costs and improving processes.
ENABLES VENDORS TO COLLECT PAYMENT
Generally, you won’t get paid for a product or service you delivered until you’ve sent an invoice. An email or phone call from your accounts receivable department asking for payment won’t be enough. Invoices act as an official request for payment.
HELPS MANAGE PAYMENTS
Invoices explain what products or services you sold, how much money you received from them, and whether you have any outstanding charges. They offer a formal way to keep track of payments.
HELPS CREATE AUDIT TRAILS
Just like POs, invoices support audit trails. When you look at them, you’ll know exactly what was charged for a product or service. They also offer records for any future financial needs.
Invoices are also legally binding documents. In the event your business doesn’t receive payment, invoices confirm what you’re owed. It can also be used as evidence in the event your business is named in a lawsuit.
The Key Differences Between POs and Invoices
While POs and invoices have similar functions, their purposes are different. POs are sent by businesses (buyers) to vendors (sellers) to initiate the purchase of goods or services. Invoices, on the other hand, are sent by sellers to buyers and act as an official payment request once the order has been filled. Here’s a closer look at the differences between POs and invoices.
Generated at the end of the transaction. Invoices are sent with order to formally request payment
Helps avoid understocking or overstocking inventory
Key Similarities Between Purchase Orders and Invoices
Despite the fact POs and invoices have different purposes, they also share several similarities, including:
BOTH ARE LEGALLY BINDING: POs and invoices will stand up in a court of law, offering peace of mind and security for buyers and sellers.
BOTH HELP OPTIMIZE SPENDING: Both documents provide more visibility into your financial processes, reducing unnecessary spending and informing you of exactly what your business is spending money on.
BOTH INCLUDE BASIC AND NECESSARY INFORMATION ABOUT SALES TRANSACTIONS: When paired with goods receipt notes, POs and invoices allow for three-way matching, which is a payment verification technique that can help you prevent paying fraudulent or incorrect invoices.
Why Your Company Should Use Both POs and Invoices
Even though the buyer-seller relationship is evolving, POs and invoices still play an important role in B2B vendor relationships. In fact, the current state of B2B transactions dictate the need for POs and invoices.
This is because they provide valuable clarity on the terms of sales transactions, set expectations of pricing, delivery date, and the quantity of goods or types of services. In addition, both POs and invoices offer legal protection for buyers and sellers.
Why Your Company Should Automate Your PO and Invoice Processes
If your PO and invoice processes are manual, workflow automation is the answer. MHC has proven experience in helping AP and AR teams defeat manual procedures, and with our next-gen solution, MHC NorthStar, you can make your important yet tedious processes more efficient.
Your AP department can benefit from MHC NorthStar as it features intelligent document capture and automated document processing, which can eliminate the time wasted on error-prone data entry. Since automation also eliminates approval bottlenecks, it’s no surprise that 32% of people saw a quicker approval of invoices when using automation software.
MHC NorthStar also has your AR department covered with invoice generation, real-time payment tracking, and custom communication capabilities.
It’s a no-code, cloud-based platform that’s designed for quick implementation and can scale with your business. Request a demo today!