Quote – Purchase Order – Sales Order – Invoice – What is the Difference?

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All B2B sales processes and some B2C businesses have several micro-steps in the flow of products or services, from prospecting to the final sale and after. Many documents are involved in a sale; some are legal requirements, while some make processes easier or safeguard your business. To understand each step and the actual process, you must know the various terms used in every stage of the sales pipeline. The four most important documents are:

1. Sales quote
2. Purchase order
3. Sales order
4. Invoice

Let’s understand each document and the differences between them.

What is a Sales Quote?

A sales quotation or a sales quote is often the starting point for a business transaction. A prospective buyer requests a quote on the products or services they need. You create a quotation that includes an itemized list of products, solutions and services based on the potential buyer’s preferences and problems, the prices for those products, solutions or services, and the terms of sale and payment. The potential buyer may then accept the quote, negotiate prices or terms, or reject it and choose to look at other businesses for their requirements.

 

Information that Should be Included in a Sales Quote

• Seller’s company details
• Prospects company details
• Quote number
• Date of issue
• An itemized  list of product and services to be provided
• Quantities
• Product descriptions
• Any exclusions
• A complete breakdown of costs
• The total cost of the project
• Additional charges
• Timelines and completion dates
• Factors that may affect the completion date
• A place for the customer to sign their acceptance
• Payment methods

Read How to Write a Professional Sales Quote: Detailed Guide and Proven Tips for detailed information on creating winning sales quotations.

A sale quotation is only a commercial document and not used in accounting. The quote should clearly state that it is a sales quotation as the heading of the document.

If the prospective buyer does not agree to the quote, they can discuss any desired changes with the seller, who can then make those changes and send the prospect an updated quote. This back and forth can sometimes happen more than once till the buyer and the seller both reach mutually acceptable terms and prices for the scope of work outlined in the quote.

Once accepted by the potential buyer, a seller must honour the quote at the prices quoted, unless the scope of work increases, in which case new line items may be added to the quote or a new quote can be created with additional requirements.

 

An example of how a sales quote is used to purchase goods.
You ask a business for prices of laptops of a specific configuration from different brands. The seller then sends you a formal document with an itemized list of laptops from various brands they stock with prices for each.

 

An example of how a sales quote is used to purchase services.
You can also request a  quote for services like installation, repairs, cleaning services, paint jobs for your office, etc. The painting service, for instance, will prepare a quote based on hours, areas covered, the amount of paint required, timelines, etc.

 

What else is a sales quotation sometimes called?
It can be called a quote or a quotation. There are also estimates and proposals, and many businesses use the terms sales quotes, estimates and proposals interchangeably. There are key differences between each of these documents, and it is best to get clarity from the buyer about their expectations.

Read Key Differences between a Sales Proposal and a Sales Quotation and How You Can Get Them Right

 

Where is a sales quote  used during a sales cycle?
A potential buyer sends a request for a quote (RFQ) or makes enquiries about the seller’s goods or services. The sales rep from the seller’s company understands the exact requirements of the prospect and then creates a sales quotation for the buyer.

Once the buyer accepts the sales quote, they send a purchase order or a PO to the seller.

What is a Purchase Order?

The purchase order or PO is created by the buyer to communicate an itemized list of products or services they want to purchase from the seller. In B2B purchases, the procurement department at the buyer’s company would send the purchase order to the seller or vendor.

Purchase orders help businesses control their spending, streamline the process of acquiring goods and services, and create a proactive spend culture that improves the bottom line.

A PO includes the specifics of the products or services requested, including an order description, quantities of each item, and the agreed-upon price and payment terms. Businesses track their purchases and spending through the PO number on each PO they send.

What is a Purchase Order Number?

A purchase order number or a PO number is a unique number usually auto-generated by the procurement software to distinguish each PO. This number is important for B2B transactions, and sellers must include the PO number on the sales order and invoice for the particular order. This number is referenced by the buyer and the client throughout the transactions making it easy to track the order and transactions.

Information that Should Be on a Purchase Order

• The date
• Purchase order number
• Sellers information
• Description of products and/or services
• Quantities
• Prices
• Tax Information

Why Is a Purchase Order Important?

A PO is legally binding
A PO is an official agreement between the buyer and the seller, authorized by the management of both companies. If the seller fails to deliver on the agreed terms of a purchase order, in certain circumstances, the buyer can take legal action against the seller and vice versa.

 

Easier to track transactions
By referencing the PO number in internal and external communication, buyers and sellers can easily track transactions.

 

Simplifies invoicing for the seller
Sellers can easily auto-convert fulfilled POs to invoices and reference the PO number on the invoice sent to buyers to show that the order was pre-approved by the buyer.

 

An example of how a PO is used to purchase goods.
A purchase order is a formal request that you’d send to the computer store once you’ve accepted their quotation and decided which laptop you want to buy from them. The PO will indicate the exact model number, description and price from the quote they sent you. It will also have a PO number.

 

An example of how a PO is used to purchase services.
Say you accepted the painting service’s quote, as an individual buyer you may not need to send a PO, but if you are a business, you would send a formal purchase order indicating the exact specifications for the job.

 

What else is a purchase order sometimes called?

Purchase orders are often abbreviated as “POs”.

 

Where is a PO used during a purchasing process?

PO’s are initiated by the buyers and sent to the seller or vendor to start the purchasing process.

Once the seller receives a formal PO from the buyer, the seller then creates a sales order for their internal processes and tracking.

 

What is a Sales Order?

The seller creates a sales order to confirm that they can supply the goods and services requested by the buyer. Once a sales order is generated and sent to the buyer, it is confirmation that the seller has reviewed and accepted the terms and prices, quantities, payment methods, and the ability to deliver the products or services to/at the specified addresses on time.

A sales order is an internal document and kept on record, allowing companies to keep track of the orders they fulfil. Though a sales order and a purchase order include the exact details of the transaction, the differentiating factor between the two is that a PO is created by the buyer and is used for their internal reference, while a sales order or a SO is created by the seller and used for their internal processes.

A sales order should include the following details:

• The seller’s company name and contact information

• The buyer’s name and contact information

• The buyer’s billing information
• The buyer’s shipping information
• Details about the products or services
• Price before taxes
• Tax, delivery, and shipping charges
• Total price after taxes
• Any previous deposit made by the buyer
• Current balance
• Terms and conditions
• Signatures
• Any other relevant information

Why Are Sales Orders Important?

Sales orders are crucial to keeping track of inventory. When creating a sales order, the software used automatically indicates if the products are in stock or if any items are on backorder and helps the purchasing department order the required items from their distributor to fulfil the order.

Sales orders are central to avoiding inaccuracies in your financial statements during an internal audit. Misstating ending inventory can inflate or reduce your company’s profits and can have some serious consequences.

Sales orders are also important in documenting a sale and indicate the expectations of both the buyer and the seller. Sellers can easily track orders, errors in delivery, etc., by referencing the sales order.

 

An example of how a sales order is used to purchase goods.

The computer store will generate a sales order based on the exact details included in the purchase order you sent them. These details confirm details like the delivery address, payment terms and methods, the exact quantities of the laptops you’re buying, and at what price.

 

An example of how a sales order is used to purchase services.

The sales order that the painting service sends you will include the details of the exact services they will be providing you, the cost per hour, the area that has to be painted, the address, and any extra services included in your purchase order like cleaning, etc., and the cost and quantities of paint required to finish the job. It will also indicate the time it would take to finish the job.

 

An example of how the seller uses the sales order internally.
For instance, the buyer calls the computer seller to inform them that a wrong product has been delivered. The seller can then reference the SO number and check if the mistake occurred while creating the SO. Some businesses omit the step of sending a SO to the buyers. In this case, the liability lies with the seller to rectify the order and send the right product. The cost for the return and shipping has to be borne by the seller in this case.

If there is no error in the SO, the mistake occurred in the warehouse while picking and packing the order. Many internal order fulfilment processes can be streamlined and rectified with the use of sales orders.

A SO also shows if any of the products are on backorder, and the purchasing department can then order those from their suppliers. Sales orders thus help in inventory management.

 

What else is a sales order called?
Sales orders are often abbreviated as “SO”

 

Where is a sales order used during a purchasing process?
The seller creates a sales order and sends it to the buyer as verification and confirmation of the details of the purchase order sent by the buyer.

Based on the sales order, the seller then proceeds to pick, pack and deliver the order to the buyer. Depending on the credit terms, the seller either generates an invoice to send before the fulfilment of the order or the invoice is sent as per the credit terms.

 

What is an Invoice?

The seller generates an invoice to request payment from the buyer for the products or services delivered. The invoice specifies the exact items and prices agreed upon in the PO and the SO. In addition to all the details in a PO and a SO, the invoice includes the seller’s banking information and accepted forms of payment.

While the details in the PO, SO and the invoice will always be an exact match, the purpose each of these documents serve is very important to not just the sales process but in various processes like accounting, inventory management, legal, etc. Hence it is necessary not to use these documents interchangeably.

A PO is generated and sent by the buyer, a SO and invoice are generated by the seller based on the PO. The main difference between a SO and an invoice is in the processes it triggers for the seller.

A sales order is a confirmation of a sale. It prompts sellers, or their picking and packing teams, to start assembling the order and getting it ready for delivery.

An invoice is then generated to request payment for the order. Invoices should include the buyer’s PO number to show the buyer’s accounting department that the sale was initiated and approved by the buyer, thus speeding up the payment process.

Why Are Invoices Important?

An invoice is the most definitive evidence of a sale between the buyer and a seller. The document indicates the sale of products or services at mutually agreed prices and terms.

Invoices are important for both the seller and the buyer.

Sellers track the revenue generated or company debt through invoices. Invoices are also used to track sales figures, make future forecasts and track the performance of the sales teams.

Buyers can track their spending and procurement processes and patterns through invoices. Keeping a record of invoices is crucial for tax purposes for both the buyer and the seller.

An example of how invoices are used to purchase goods.

After the computer store delivers your order, they will also send you an invoice indicating the amount owed to them. There will be a date mentioned on the invoice before which you have to clear it.

 

An example of how invoices are is used to purchase services.
Once the painting job is complete, the painting service will send you an invoice that indicates their charges based on the hourly rates and any additional charges incurred to provide you with the service.

 

What else are invoices called?
Invoices are sometimes also referred to as “sales invoices”.

 

Where are invoices used during a purchasing process?

Sellers send invoices to request a payment from the buyer once the products or services have been fully delivered by the seller.

This completes the sales process.

Now that we’ve individually covered these documents, let’s look at some key similarities and differences between them.

Similarities Between Purchase Orders and Sales Orders

• Both POs and SOs have an itemized list of the products and services expected in the transaction.
• Once the seller accepts the PO and the buyer the SO, they are legally bound to honor these documents.
• B2B transactions typically use POs and SOs for procurement and sales processes.

Differences Between Purchase Orders and Sales Orders

• The buyer sends a PO while a SO is generated and sent by the seller.
• A PO does not have a SO number, but a seller must include the PO number on a SO.
• Many B2B companies have policies that state that a SO without a PO number will not be considered valid and the resulting invoice not honored to streamline procurement processes.

Similarities Between Purchase Orders and Invoices

• Both documents contain important details such as products and services ordered, their quantities and the price.
• Financial accounting departments of both the buyer and the seller keep invoices on file. The buyers keep them as accounts payable and sellers as accounts receivable.
• Both documents include company details, contact information and the addresses of the buyer and the seller.

Differences Between Purchase Orders and Invoices

• The buyer sends a PO, while an invoice is sent from the supplier.
• A PO indicates the buyer’s intent to purchase products or services from the seller, while an invoice indicates that the seller completed the sale and requires payment for the products and services sold to the buyer.
• A PO, if not preceded by a request for a quote, is one of the first documents to indicate an intent of purchase by the buyer. An invoice is the last document to be sent and completes the sales process.

 

Similarities Between Sales Orders and Invoices

• Both SOs and invoices are documents generated and sent by the seller to the buyer.
• SOs and invoices carry the seller’s logo and company branding.
• Both SOs and invoices contain detailed information about the products and services, quantities, prices and billing information about the sale.

Differences Between Sales Orders and Invoices

• The SO is generated once the PO is processed by the seller and carries the date when the order process begins for the seller. An invoice carries the date when the buyer is billed for the completion of the order.
• The seller sends an SO to the buyer when the PO is processed, while an invoice is sent to the buyer when payment for the delivery of the order is requested by the buyer.

• Not always does a buyer require a seller to send them an SO. A SO is often used only internally by the seller. But invoices are non-negotiable documents in the sales process.

Let’s summarize the sales process before we end this article.

Sales Order Process

1. A buyer sends a request for a quote (RFQ) to a seller.
2. Based on the requirements in the RFQ, the seller creates a quote and sends it to the potential buyer.
3. The buyer accepts the quote and sends a purchase order to the seller based on the prices and terms stated in the quote.
4. The seller generates a sales order from the purchase order.
5. The seller sends the sales order back to the buyer for confirmation. (Not all businesses follow this step. Some move on to the next step of the process once they receive a PO from the buyer.)
6. The seller begins putting the order together, packaging or assembling it to get the products and services ready.
7. The seller delivers the order or provides the service.
8. The seller then converts the sales order to an invoice and sends it to the buyer.
9. In ideal scenarios, the buyer honors the invoice and processes the payment within the allotted time.

 

Conclusion

Understanding these terms and how they affect or facilitate business processes and transactions help create streamlined order management, procurement, inventory management and accounting processes that flow smoothly without inaccuracies. It also leads to efficient record-keeping and helps businesses catch costly errors in time.

An effective order management system like VARStreet automates your sales process from quote creation to fulfilment, so you can spend less time on cumbersome administrative tasks and more time chasing prospects and buyers to grow your revenue and expand your business.