An important part of running any business is understanding the basic terminology behind operations. When it comes to accounting, two important terms that are often confused are “sales order” and “invoice”.
Both are an integral part of business transactions that identify the details needed to make a sale.
What is a Sales Order?
A sales order is an internal document that is created by a business to confirm a purchase. This is after the customer has expressed a need for the product or an agreed upon shipment date is due. It’s a means of documenting a made to order transaction.
In addition to explaining the sale, a sales order helps obtain data about the customer. This information is then added to a database to help address all needs during order processing.
Types of Sales Orders
When it comes to conducting standard business, there are four types of sales orders that are common:
In this simple type of sales order, a customer places an order, picks it up, and pays for it. After the order is entered, delivery happens immediately, since the order is paid for in cash.
Rush Sales Order
The customer needs are met the same day they place the order. The order is completed quicker than a normal lead time and the order is paid for at a later date.
This sales order details specific delivery dates and quantities. It is an external agreement where all the data is represented in schedule lines. Processing of a scheduling agreement is done in the same way as normal delivery.
Third-Party Sales Order
In this method, the delivery is not given directly to the customer, but through a third-party vendor. This party then delivers the product to the intended customer as a service. This is common for a small business.
What is an Invoice?
An invoice is a commercial document issued from a seller to a buyer. Sometimes called a “bill” or a “tab” it’s a document that relates to a sale transaction and indicates important data like:
- List of products or services
- Agreed upon pricing
- Payment terms
- Early payment discounts
- PO number
- Invoice number
- Late payment fees
- Company name
- Customer name
- Shipping address
- Contact information
The invoice contains all the information the seller needs in case there is an error related to billing.
Types of Invoices
There are several different types of invoices a company can use to bill a customer. Here are three of the most common:
Pro Forma Invoice
A pro forma invoice is not a demand for payment like a traditional invoice, it’s more of a pre-invoice. It works as an estimate of how much everything will cost once the work is done. It’s an external document (sent to people outside of the business) that features all the data an invoice will have. If there are any mistakes, there’s still time to make corrections.
A pro forma invoice is generally used for export sales when a commercial invoice is not available. It’s also created when there’s a large project that contains several products or services. It gives customers an idea of the scope of the project and the total amount that will be due once everything is completed.
When working with export sales, U.S. customs requires the pro forma invoice to contain adequate information for assessing and examining the goods. If the seller already paid for it, customs will require a commercial invoice. However, a pro forma invoice can be created at any time, should the buyer request it.
Please note, a pro forma invoice differs from a purchase order. When it comes to a P.O., a buyer and/or AP department issues it and sends it to the seller. The document is then used later on for invoice matching and payment disbursement.
An interim invoice is created when you need to break down the cost of a large project into smaller payments. Instead of sending one invoice at the end, several small ones are sent as the project progresses. The helps to maintain a positive cash flow during long projects and keeps everything moving along smoothly.
Interim invoices also benefit customers. Rather than slapping someone with a large bill, payments are broken up into smaller, more manageable chunks.
A final invoice is an official request for payment once a project has been completed, a service is rendered, or a product is sold. It must include all the necessary data the buyer needs to understand what they are paying, when the payment is due, and how they can pay.
If there is no long project or overseas shipment, the final invoice is typically the one used for all business. It is considered the “standard” invoice.
Sales Order vs. Invoice
When it comes to a sales order vs. invoice, there are many differences between the two documents. Here are some of them:
A sales order is created at the beginning of a transaction when a customer wants to buy something. It’s created by a supplier to confirm to the prospect that they can supply the goods/services requested. Once the sales order is created, the seller does everything to fulfill the order.
An invoice is created at the end after the products and/or services have been delivered to the customer and payment is needed. It is not issued unless a sales order has been processed. It includes a due date for when the customer pays and all accepted payment methods.
A sales order is an internal document and is commonly used by sellers to track their orders. The invoice, from the buyer’s perspective, represents a valid proof of business expenses. During an audit, invoices are often reviewed to verify tax returns, where auditors are using the information to ensure appropriate tax has been applied.
Since invoicing represents a financial transaction, it is always recorded in the general ledger. Invoices help keep a company’s accounting accurate and up to date. A sales order is rarely recorded anywhere as it represents more of a sales quote on an internal document.
The date on a sales order starts the day the order begins processing. It’s the date the customer puts in a request.
On the contrary, an invoice date represents the day on which products and/or services were billed (not necessarily when they were delivered). It also provides critical information about when the bill is due, which is typically 30 days after the invoice date.
The Importance of Sales Orders and Invoices
There are many reasons why a sales order is important. For starters, it shows exactly what a customer intends to buy which is invaluable to sales staff. A sales order is not a binding contract and can be later reviewed and updated. Additional information can be added like the desired quantity versus what was delivered.
A sales order also provides invaluable data to the operations team. It’s a sales document that initiates the sales process and helps staff prepare for a delivery. It helps to build a workable time frame that guides financial teams.
Invoices are important because not only are they the key to getting paid, but they also create an audit trail that protects your business. The main purpose of an invoice is to stay organized about what is owed to your company, and by whom. It’s also a record for customers.
Frequently Asked Questions
What comes first sales order or invoice?
The sales order is created when a customer expresses an intent to purchase a product/service. An invoice is generally issued at the end of a transaction, once the product/service is delivered. Sales orders happen at the beginning of the procurement workflow and invoices are created at the end.
What is the purpose of a sales order?
The sales order is created to confirm the terms of a transaction between a seller and a buyer. The seller creates the sales order, typically in response to a purchase order.
The seller usually keeps the sales order for internal use. It details the services/products provided to the client, the amount owed, and the payment deadline. Sales invoices create an obligation by the customer to pay your business for the work.
Is an invoice the same as a purchase order?
A purchase order is sent by buyers to vendors with the intent to track and control the purchasing process. This is done by assigning the document a unique purchase order number.
An invoice, on the other hand, is considered an official request for payment sent by vendors to buyers. This happens once the order has been fulfilled.
When do you use a sales order?
A sales order is required to specify details about products/services ordered by a customer, along with the quantity, price, terms, and conditions. Companies use it as a confirmation, which can be sent to the customer prior to delivery, but is generally kept internal.
Is a sales receipt the same as an invoice?
While an invoice is a request for payment, a sales receipt is proof the payment was made. It confirms the customer received the goods/services they paid for and the business was appropriately compensated.
Is an order acknowledgment the same as an invoice?
An order acknowledgment is a written confirmation that the order has been received. After receiving an order acknowledgment, it is expected that the customer should make a payment for the goods/services rendered and can therefore expect to receive a bill.
Automating the Sales Order and Invoice Process
To streamline a procurement system, a business can choose to automate several parts of it. Both the sales order and invoice process can be automated. This includes:
Sales Order Tracking
Once a customer expresses their desire to purchase, the clock starts ticking. If a company takes too long to deliver, it can affect the relationship and lead to a negative experience.
Automation ensures sales orders can be tracked so customers can communicate every step of the way. By creating this level of transparency, people are more likely to accept a late delivery under extenuating circumstances. They have access to the status of the delivery throughout the entire procurement process.
Invoices can be processed automatically with OCR (optical character recognition) rather than manual input. Not only does this save time and money, it eliminates human error and data entry mistakes. Once the data has been retrieved, it is automatically entered into the system under customer information.
Invoice matching is an automated process that ensures there are no discrepancies between the invoice and the sales order, purchase order, packing slip, inspection report, or any other document needed to validate the bill and get it paid.
There are three tiers of invoice matching: 2-way matching, 3-way matching, and 4-way matching. All of which can be performed by a computer.
Most invoices require some form of approval to get paid. Rather than chasing documents or burying invoices on a desk, an automated process ensures the invoices gets to the appropriate parties, as quickly as possible.
An advanced AP software solution will also enable an AP team to set up automatic approval notifications to remind people to sign off and keep the cash flowing.
Summing it All Up
Comparing a sales order vs. invoice is mostly about knowing the proper terminology and timing of each procurement task. Logically speaking, a sale always happens before an invoice, so the sales order is the first document in the pipeline.
Both of these statements are important for accounting. Although a sales order is generally regarded as an internal document, an invoice can be used to form a legal audit trail. So, as it follows, invoices have more accounting power.
As long as a business has a comprehensive understanding of the sales journey and procurement process, creating sales orders and following through with the proper style of invoicing will become like second nature. Now it’s up to accounts receivable to grab the baton and ensure positive cash flow.