Tracking a sale from start to finish helps businesses maintain the right inventory levels, implement the best cash flow tactics, and ensure customers are receiving the right products. Since most businesses are monitoring multiple sales at once, keeping an accurate record of every step along the way is crucial.
Regardless of the business type, operating industry, or even region, businesses rely on sales orders and invoices to ensure every sale is executed properly, payment is received, and a paper trail is in place. However, sales orders and invoices are not the same thing; in fact, they are used for entirely different purposes. Both are equally important, but understanding the difference between a sales order and an invoice will help ensure that your business benefits from both.
At a high level, a sales order comes first. It’s the document created when a customer expresses a desire to purchase something and works with your sales team to agree on a delivery timeline for the goods or services included in the sales order. Once the order is shipped, your accounts receivables team will send the customer an invoice to collect the funds that are owed for the order.
No matter what your sales process looks like, chances are it starts with a sales order and wraps up with an invoice payment.
What is a Sales Order?
If you are a vendor or seller, then your team will create a sales order once the customer has expressed interest in making a purchase. Usually, a customer expresses interest through a purchase order. The sales order confirms the receipt of the order, finalizes the details, and serves as a source document for internal sales teams and sales tracking systems when completing each sale.
A sales order requires detailed information, so if you don’t already have all the customer information required, your team may need inputs from the ordering customer to fill out the sales order. The information that’s included on a sales order is:
- The name of your company
- Contact information of your company
- Customer’s information (name, billing information, address)
- Description of the product or service being sold
- Quantity of goods or services included in the sale
- Price of goods or services
- Delivery, shipping, and tax cost
- Total cost of the order
There are multiple types of sales orders that your business may use. Depending on the situation or sales landscape, many businesses use all 4 of the following on a regular basis:
Cash Sales Order
When a customer places an order, picks up the product, and pays in cash, a cash sales order is used. Because the customer pays in cash, there is no accounts receivables entry associated with the transaction. The customer’s purchase directly impacts your cash accounts and delivery is made immediately.
Rush Sales Order
If a customer requests an abnormally fast delivery timeline, a rush sales order would be used internally. Your sales team can flag these types of sales orders as high priority to ensure they are completed in time. The customer may pick up the goods or pay extra to have them delivered quickly, depending on the circumstances. After the product is delivered, your AR team will send an invoice to the customer to collect payment.
Scheduling Agreement
In a situation where a customer requests a specific quantity of products delivered on various dates, a scheduling agreement can be a great tool to keep every separate delivery straight. If a customer wants 10 widgets in a week, 5 in two weeks, and 7 in three weeks, all of those transactions can go on one scheduling agreement that then gets updated after delivery.
Third-Party Sales Order
In some cases, especially for small businesses, a third-party sales order is used when your business doesn’t deliver the goods or services directly to the customers. Instead, you send them to a third-party vendor that then completes the final leg of delivery to the customer.
What is an Invoice?
When vendors or sellers complete a sales order and deliver the agreed-upon product, they will then generate an invoice and send it to the customer to collect the payment for the goods or services delivered. One of the final steps in the sales process, sending an invoice initiates customer payment and cash collection, two vital components of keeping your business healthy. Today, invoices are usually sent electronically and called e-invoices.
The invoice will have most of the same information that the sales order has, but it will also include the following:
· Payment terms
· Early payment discounts
· PO number
· Invoice number
· Late payment fees
· Payment information for ACH, wires, or EDI payments
In the same way that there are multiple sales orders used in different situations, different invoice types are often used in business transactions.
Pro Forma Invoice
Usually, invoices are thought of as contractual payment requests, but a pro forma invoice doesn’t have the same use. It’s used when a commercial invoice isn’t available and can be thought of as a “pre-invoice.” It still contains a cost breakdown, but it’s more of an estimate that the customer can use for reference.
When exporting goods to the United States, U.S. Customs requires a pro forma invoice to be attached to the order so it’s clear what’s being sent across country lines.
Interim Invoice
If there is a large project or multi-part order that needs to be broken down into multiple payments or stages, an interim invoice comes in handy. Instead of waiting until the end of the project to send one large invoice, interim invoices can be used to collect incremental payments along the way. On the seller side, interim invoices help alleviate cash flow challenges, and on the buyer side, they break payments into more manageable amounts. This is the opposite of netting multiple invoices into one payment.
Final Invoice
The most common type of invoice used is the final invoice. This tends to be one of the simplest invoice types for settling invoices, making it the standard for most businesses. They are sent to customers once goods or services are delivered.
Sales Order vs. Invoice: The Differences
The primary distinction between a sales order and an invoice lies in their purpose. A Sales Order is generated by a vendor to confirm their ability to fulfill requested goods or services. In contrast, an Invoice is crafted to request payment for goods or services already delivered to the buyer
Sales order vs. invoice is easy to differentiate when you consider the factors below:
Timing of Creation
A sales order kicks off the sales process; it’s what lets your fulfillment team know to start preparing goods or services for delivery. Then, at the very end of the sales process, once delivery has been completed, an invoice will be sent to the customer.
Purpose of Document
When looking at an invoice vs. sales order, it’s important to consider each document’s purpose. A sales order is more internal-facing, letting your teams know that an order has been initiated and action is required. An invoice, on the other hand, is external-facing. It is sent to the customer as a formal demand for payment. If an invoice due date isn’t met, late fees or other penalties could be imposed upon the customer.
Information Listed
While the difference between a sales order and an invoice is more about when and how each document is used, there is a slight variation regarding the information that each contains. They’ll both contain info like the customer’s name and contact information, the quantity and price of the products being purchased, and the vendor’s information, but an invoice will include additional details. These details may be late fee rates, payment due dates, and more. Refer to our lists above for an exact breakdown of what’s on each.
Accounting Implications
A sales order won’t be seen or touched by your accounting team usually. Unless they are looking to match a sales order to a specific invoice, they won’t rely on sales orders. Invoices, on the other hand, are critical pieces of accounting documentation. They are needed to provide accurate audit trails and ensure entries are correct.
Conclusion
It could be easy to look at an article covering the difference between sales order and invoice and think that its impact is negligible. But, on the contrary, understanding the foundational purpose of major business documents will help your business run more efficiently, mitigate potential fulfillment and accounting errors, and create internal processes with the right checks and balances in place to protect your business from risk.
At the end of the day, your teams will need sales orders and invoices alike, but the way different teams will use each will vary. Your sales team needs sales orders to ensure deliveries are being completed as promised but accounts receivables experts will live and breathe invoices each and every day. It takes these teams working in unison and having the proper resources needed to do their jobs for your business to reach its ultimate potential.
Understanding sales order vs. invoice might not seem like a strategic leadership priority, but to many people in your organization, there is nothing more important. If you’re ready to take your sales order management and invoice processing to the next level, investing in the right automated invoice processing software – like Nanonets – can make a world of difference.
