For anyone running a business, it is crucial that you have an understanding of the purchasing process. Between ordering, shipping, and receiving, there is a learning curve that sellers must overcome to be successful. Full disclosure: this is easier said than done. However, by conducting research and some good old-fashioned trial and error, you can become a pro in no time. Are you hung up in the purchasing process? Unsure of the differences between invoices, packing lists, and purchase orders? We have FREE templates for that.
Sellers have to learn how to purchase efficiently and figure out what works for their business. In this post I will help ease any apprehension you may have about your the purchasing process by going over the basics of purchase orders, invoices, and packing slips.
A purchase order (PO) is an order request that is a legally binding document sent from a buyer to a seller. This document contains details about the item type, quantities, and agreed upon prices for products or services. Buyers also use purchase orders to insure the products that arrive are indeed the products they ordered.
During transactions, it is not uncommon for sellers to ship orders prior to payment. Sellers feel comfortable doing this because purchase orders also act as a form of risk and legal protection. Meaning, if for some reason a buyer refuses to pay, the seller is protected by the PO, and it can be used as a binding contract between both parties.
Since the introduction of purchase orders into retail industries, the purchasing process has become more efficient and allows for better inventory and payment tracking.To submit a purchase order, the buyer typically uses an electronic software system which allows for better tracking and electronic submission to suppliers. Purchase orders provide necessary details sellers and buyers use to keep accurate data on past sales or purchases.
The purchase order includes:
- a PO number
- a shipping date
- billing address
- shipping address
- the requested items, quantities and price
The purchase order number is especially useful for tracking. Sellers are able to match shipments with purchases using PO numbers, which include information about that particular order and its buyer. On the flip side, purchase orders also include seller’s information for the buyer’s benefit and convenience.
After a buyers generates a purchase order, the seller prepares an invoice which will be sent to the buyer. An invoice is a non-negotiable document issued by a seller to a buyer. It identifies the trading parties, lists, describes, and quantifies the items sold, shows the date of shipment and mode of transport, prices and discounts, and delivery and payment terms.
As you may have noticed, invoices and purchase orders outline many of the same details. This makes sense because the invoice basically acts as a bill for the order.
It’s very important that both documents contain the same information so that each party can confirm accuracy.
The primary difference between them is the purpose of the documents and technical details that are on the PO that are not included on an invoice.
For sellers, an invoice serves as a polite way to ask buyers for the money they owe for products delivered. Invoices are a friendly reminder that the goods delivered have still not been paid for. Like other billing methods, invoices sometimes allow for extensions on payments.
Companies usually only use invoices in B2B transactions. The transaction of goods between business is more credible than B2C sales, so sellers are confident they will receive payments when buyers can make them. Additionally, it is likely that the buyers plan to distribute purchased goods for a profit so paying the seller should not be a problem for them.
Invoices document the transaction as accounts receivable until all debts have been paid. This reminds sellers that there is still an order that has yet to be paid for, and the seller can set up their systems to remind them when to collect or take alternate actions to receive payment if need be.
Don’t have an invoice template? You can download free one here.
A packing slip is a shipping document that comes with an order, usually inside an attached shipping pouch or inside the package itself. Sometimes referred to as a shipping list, waybill, packing list, bill of parcel, or unpacking note, a packing slip provides buyers with product details that ensure the product is indeed what they ordered.
Both invoices and packing slips are sent to buyers from sellers, but they serve completely different purposes. All businesses use invoices, but not all business use packing slips. For example, service-based business do not use packing slips for a very obvious reason… they don’t sell products.
Packing slips are only required if there are products being shipped and received for sale.
Another difference between an invoice and a packing slip is who receives the documents.
If you are the one sending these documents it's important to keep in mind who will actually be receiving them. The invoice is to be sent directly to the person responsible for payment, while the packing slip is delivered to the person who receives the package. Sometimes this can be the same person, but in many situations it is not. It is important to remember this so that there are no miscommunications whether buying or selling.
Every shipment should have a packing slip, but the details included on packing slips vary depending on the business and products sold. The document should list the order date, the products included in the order, and the quantity of each product. Depending on the business, the weight of the product may also be included. Details like these are important to many buyers who use the packing slip as a guide when unpacking their order. If anything is missing or counted wrong, they can cross reference it with the packing slip and alert the seller.
How It Works
When transactions between buyers and sellers are executed properly both parties win. The seller makes a profit from the buyer, and, in turn, the buyer makes a profit from the consumers, who ultimately purchase the product. Thanks to purchase orders, invoices, and packing slips this process runs smoothly and efficiently. Take a look at this example of how these documents work together.
Carl has been informed that he is running low on stock for his top selling product. Carl (the buyer) creates a purchase order with the quantity and specific requirements for the product.
The supplier of Carl's product is a company which specializes in manufacturing and selling the product Carl needs. The company (the seller) confirms they are able to supply the product with the required specification, and approves the PO.
The Company then ships Carl the product and sends him an invoice and packing slip. Once Carl confirms his order is correct and makes the payment, the transaction is complete. The company uses the invoice to confirm the payment was received, while Carl cross-references the invoice, purchase order, and packing slip to ensure that all three matchup. He then updates the quantity of this item in his inventory so customers can continue purchasing this product.
Once someone purchases his product, Carl will then begin the shipping process. It is during this process that he will create a packing slip to send with the product. Before sending his product, Carl confirms that he is shipping the right item by comparing the packing slip to the purchase order. This step alone avoids any possibility of the transaction resulting in a mis-ship. Carl then ships the customer their product along with an invoice and packing slip. Once the customer receives the product, they will then use the packing slip to confirm their purchase.
When running a business or warehouse it is very important to know the differences and roles that these documents play in the purchasing process.
Purchasing for a business can be a stressful process for some. Learning how to properly place and receive orders can be tricky, especially if you have never done it before. However, it is something that you simply must learn to do properly, and once your get the hang of it, purchasing can be a smooth seamless process. Remember these basics and take advantage of the provided templates to take control of your business.