Did you ever wonder why suppliers could not simply place purchase orders and receive payments without an invoice?
Why not just invoice anyway? Everything is already detailed in the purchase orders — what is being ordered and the cost.
Indeed, approximately 75% of companies now use digital purchase orders to enhance procurement efficiency, although they still need invoices to complete the cycle and receive payments (Billnama).
A purchase order (PO) is the buyer’s indication that they are willing and ready to buy goods or services, setting expectations regarding the items, quantities, and prices (Spendflo).
Nevertheless, the purpose of an invoice is entirely different: it is a confirmation that the goods or services were delivered and the demand to pay according to the delivery; it is thus legally and financially important that accounts payable should identify and document the liability (Billnama).
Financial control and compliance also entail invoicing. Structured invoices enable PO-to-invoice matching, help prevent overpayment and fraud, and provide a clear audit trail for budgeting, compliance, and tax reporting.
Companies do not have an invoice, so they do not have the official document they need to book expenses, schedule, and manage cash flow, which may result in disagreements, inaccurate records, and late payments (HighRadius).
We are going to address these worries and others in this blog by dissecting why invoices are not merely an additional step but a mandatory one, why invoices and purchase orders differ, and why the current procurement and finance departments should master both.
Why Are Sales Orders Important?
A sales order is the confirmation of a sale that prompts the vendor to begin assembling, packaging, and preparing the goods and services requested in a purchase order. From the vendor’s perspective, sales orders play a pivotal role in helping you keep a real-time track of your inventory: when to restock and what you already have in stock.
Moreover, when a customer agrees to a sales order, you enter into a legal agreement with them: they will pay you a specific amount of money for the products or services you sell them on the mentioned conditions in the sales order.
This can help you get the order secured and avoid unexpected cancellations. Moreover, you can consult your lawyer to help you explain any complex conditions the customer mentions in the sales order. This ensures that you will deliver the order on time for a timely payment for your services or products from the customer.
Further, sales orders also help you avoid material misstatement in your company’s financial reporting. It is a type of inaccuracy that can lead to errors in financial statements, ultimately affecting the economic decisions and forecasts you make for your company. This can really halt your business growth and cause serious financial drawbacks.
Keeping track of sales orders can also help your firm stay transparent during an audit. This ensures that you are not stating your company’s profits or losses incorrectly.
HubSpot, in their blog titled, “Sales Orders: What They Are Compared to POs & Invoices,” writes that, “A sales order is a commercial document — prepared by a seller and issued to a customer — confirming the sale of goods or services involved in a given transaction.”
Sales Order Format:
A sales order usually contains the following details:
- Company name and contact information
- Customer name and contact information
- Customer billing information
- Customer shipping information
- Product or service information
- Price before taxes
- Tax, delivery, and shipping charges
- Total price after taxes
- Any previous deposit
- Current balance
- Terms and conditions as defined by your company
- Signatures
Sales Order Process
A sales order process is as follows:
- A customer requests a quote for a product or service from a seller.
- Once the vendor receives this request, they send the customer a quote for the requested product or services.
- If the customer finds the quote reasonable, they send a purchase order.
- Upon receiving the purchase order, the vendor uses its details to generate a sales order.
- The vendor then sends the sales order to the customer to confirm the terms and quote of the sale.
- Upon confirmation, the vendor starts assembling, packaging, and preparing the goods and services listed in the sales order.
- After this, the vendor generates an invoice using the details mentioned in the sales order and sends it to the customer, after which the customer pays the amount mentioned on the invoice within the specified time frame.
This whole process ensures that a sale is properly documented and conducted, and that both parties, namely the customer and the vendor, are on the same page and agree to the terms in the sales order. Thus, a sales order is essential for ensuring smooth, efficient order processing from start to finish.
After the confirmation of a sales order, the vendor sends the buyer an invoice specifying the amount the buyer owes the vendor for the services and products requested, under the specific terms agreed in the sales order. The vendor generates both the invoice and the sales order. The difference is that invoices are generated once the sales order processing is complete.
A sales order prompts a vendor to start assembling, packaging, and preparing a product or service. The invoice, on the other hand, informs buyers how, when, and how much they are supposed to pay for the purchased products and services.
Why Are Invoices Important?
Invoices definitively settle deals for vendors and establish official payment timelines. Thirty days is a standard timeframe, but it can vary by business.
Invoices are highly important documents; they finalize deals for vendors and set official payment time frames. An invoice is the most accurate and concrete evidence that both vendors and buyers have for a purchase order.
Keeping track of these can help you stay on top of your spending and earnings. This also increases accountability among your employees who may be responsible for any additional purchases or sales.
Moreover, it can also help you track any outstanding debt that your business may owe to its investors. Keeping detailed records of invoices can be a critical part of that process.
Moreover, it is a best practice for businesses to keep a real-time record of all their invoices for tax purposes. The IRS suggests that companies maintain a running summary of all business transactions.
Invoices can also help your business fight legal battles. For example, if a customer refuses to pay for your services, you can take them to court, citing an agreed sales order and an invoice as concrete evidence of the purchase order. A signed invoice shows the agreement in place, reducing the risk of any illegal action from you or the customer and overpricing.
The Basics of an Invoice
The basic details on an invoice include the face of the bill, a unique identifier number, aka the invoice number, which is useful for internal and external reference. It also contains the vendor’s contact information in case there is an error on the invoice.
Terms
Payment terms, such as when the customer should pay the bill, may be outlined on the invoice. It can also include discounts you may offer customers, early payment details, and any additional charges for late payments.
An invoice also includes the unit cost of an item, the total number of products purchased, freight, handling, shipping, and tax charges, outlining the total amount the customer owes the vendor.
Timing and Printing
Some companies prefer to send a month-end statement as the invoice for all the outstanding transactions. In this case, the statement should mention that no further invoices would be sent. Back then, invoices were recorded on paper, which could lead to errors and duplicate entries.
With the advent of accounting technology, however, businesses are rapidly adopting automation and outsourcing. Doing this, they can free up their existing resources and reinvest them in core areas to accelerate business growth. This is also something we do at Expertise Accelerated, where cost-effective accounting solutions serve as a gateway for your success venture.
10 Handy Tips To Simplify The Sales Order To Invoice Process:
1.Standardize Sales Order Data at the Source:
Mistakes made during the sales order propagate down to the other level. Companies that standardize item descriptions, pricing, taxation, and customer information during order processing have fewer invoice discrepancies and rework loops (Docparser). Regular data ensures invoices are accurate against the approved sales terms without manual intervention.
2.Improve Clear Approval Workflows of Sales Orders:
A firm should be committed to a sales order. Firms that use predetermined approval limits based on the order value or customer credit minimize invoice conflicts and late payments. Sales orders approved provide a clear basis for invoicing.
3.Automate Sales Order to Invoice Conversion:
The creation of invoices manually is an important bottleneck. Companies with ERP or automated accounting systems that directly convert sales orders into invoices indicate that billing time is reduced and error rates are minimized. Automation ensures that quantities, prices, and terms are consistent between the order and the invoice.
4.Integrate Sales, Finance, and Operations Team:
Lack of alignment among departments is one of the most common reasons for billing delays. Small teams comprising sales, finance, and fulfillment work on the same system and definition, resulting in invoices being issued when delivery milestones are met, leading to fewer customer disputes and reissues.
5.Corresponding Invoices to Delivery or Service Confirmation:
What is ordered should not be invoiced; what is actually delivered is what should be invoiced. Tying in invoices to shipping confirmations, delivery notes, or service completion records enhances accuracy and gives customers a good explanation of charges.
6.Real-Time Pricing and Tax Validation:
Order placement and billing may vary in terms of pricing, discounts, and taxes. Companies that enforce real-time pricing and tax validation at invoice creation minimize compliance risk. Avert leakage of revenue due to old data.
7.Adopt Exception Handling Rules:
Not every order is clean. Setting up a predetermined set of rules to address information on partial shipments, back orders, or contract amendments can help teams sort the exceptions quickly and does not impede the invoicing process. Exception management maintains control in billing (Wizcommerce).
8.Have a Single Source of Truth:
There are disjointed systems resulting in records that do not match. The visibility, speed of reconciliation, and audit trail of the order-to-cash cycle in companies that centralize sales orders, invoices, and customer data on a single platform are more significant.
9.Observing Cycle Time and Error Measures:
What gets measured improves. Monitoring metrics such as order-to-invoice cycle time, invoice rejection, and days sales outstanding (DSO) enables understanding of bottlenecks and focusing on process improvements that directly influence cash flow.
10.Train Teams on Process and Documentation Standards:
Technology is not the answer to process gaps. Continued training makes the staff aware of the functional distinctions among sales orders, invoices, documentation, and compliance expectations, thereby reducing the need for corrections and manual follow-ups.
Conclusion
Close coordination of sales orders to invoices is also essential for proper billing, prompt payments, and better customer relations. Normalise data, automate work processes, align teams, and impose explicit controls.
Businesses can remove friction between sales and the invoice process. The integration of sales orders and invoices within a single system enables organizations to gain financial visibility, improve cash flow, and achieve a reliable order-to-cash cycle.
