You get sales orders, purchase orders, and other kinds of orders. What is the difference between them? What is the difference between an order and an invoice? These are questions that people often ask, so we thought we would give you some answers.
The bottom line is that when you accept the order of a vendor or customer you conclude an agreement with that vendor or customer – on their terms. And whenever a customer or vendor accepts your terms, you conclude an agreement with that customer or vendor on your terms – which is ultimately what you want every time you conclude an agreement. In practice, people often accept terms without considering them properly and end up with a very unfavourable agreement.
people often accept terms without considering them properly and end up with a very unfavourable agreement
Kinds of Orders
Let’s look at the different kinds of documents that may be issued between a customer and vendor:
- An invoice is a document issued by a vendor to a customer that usually indicates the price and payment methods for goods or services. It is usually a document in addition to the purchase or sales order. The purchase or sales order will contain the terms of the agreement between them. The vendor must therefore make sure that any terms specified in the invoice, which are also dealt with in the purchase or sales order, correspond with the purchase or sales order terms.
- A purchase order is the offer that a customer makes to a vendor of goods or services. A purchase order usually details the type, quantity, price, and delivery details of the required product or service to be provided to the customer. If the vendor accepts the purchase order, an agreement is concluded on the terms of the purchase order. A purchase order works both ways: the vendor is bound to supply the goods or services to the customer in accordance with the agreed terms of the purchase order and the customer must pay for the goods or services on the agreed terms. The vendor must also issue an invoice that corresponds with the terms of the purchase order.
- A sales order is an offer and indicates the terms on which a vendor is prepared to provide its goods or services. If a customer accepts these sales order terms, an agreement is concluded not on the customer’s purchase order terms, but on the terms of the vendor. Again, it works both ways, the vendor must adhere to its own terms to provide the goods or services and the purchaser must act in accordance with these terms. A vendor must always make sure that the terms of its sales order and invoice correspond.
Purchase Order and Sales Order?
The problem comes into play where the terms of the purchase order and sales order do not correspond. In reality, this will be in most instances. In practice, a business may receive a “formal” purchase order or a more “informal” verbal order or order by email without any specifications, from a prospective customer. The vendor may either accept the purchase order from the customer, or may reply with its own sales order (or general terms of business). In the latter, it may be difficult to determine on which terms the parties actually agree – the customer’s purchase order terms or the vendor’s sales order terms.
Both a Vendor and a Customer?
Another issue in practice is that it often happens that a business is a vendor of goods or services on the one hand, but on the other hand needs to be supplied with goods or services from its suppliers or independent contractors. The business is the customer in that second relationship. Whilst most businesses should have adequate sales order terms (or general terms of business) in place, the purchase order terms are often neglected and people often end up accepting their supplier’s sales order (or general business terms) without considering them in detail.
It is critical to know the terms of your agreement. Be careful not to merely accept terms of a purchase or sales order without considering all terms that may be incorporated by reference (included from another document). Sometimes you will be the one in the stronger bargaining position and sometimes you won’t. If you have to contract on your vendor’s or customer’s terms, be very careful to consider the terms in detail and to understand exactly what you will receive and what obligations you have. There may be instances where it will be better to rather walk away from a transaction than to take on unacceptable risk.
It is also very important to make sure that the terms on which you contract with your suppliers or independent contractors, flow through to the terms on which you provide goods or services to your customers. Especially when it comes to terms dealing with warranties, and indemnities and liability. You should be very careful not to offer more than what you receive from your supplier or independent contractor.