Sales Order vs Purchase Order

Sales Order vs Purchase Order


So what is the difference when it comes to a Sales Order vs Purchase Order? In this article, I will explain how the purchasing process in businesses usually works. I then go on to explain how the Sales Order Processing workflow works in a business. I will explain the difference between a Sales Order and a Purchase Order, and indeed a Sales Invoice and I provide free templates for each.

At the end of this article you will be able to explain what each of these documents is, how they are used and why they should be used.

What is the difference between a Sales Order and a Purchase Order?

The best way to explain this is with an example. Company Panadaware wants to purchase 100 PCs from Vulcan Labs. 

Sales Order vs Purchase Order workflow diagram between customer and supplier
Sales Order vs Purchase Order Diagram

In this example Pandaware will raise a Purchase Order for the 100 PCs, this will be authorized by an officer of the company (often the business owners) or someone they have delegated authority to. This authorized and signed Purchase Order (PO) will then be sent to the Sales Department at Vulcan Labs. When Vulcan Labs receive the PO they will create an internal document called a Sales Order from the PO document. If Vulcan Labs accept the Purchase Order and raise a Sales Order, they will probably send a copy of their Sales Order back to Pandaware as an Order Confirmation. This would quote the customer’s Purchase Order Number and also give Vulcan Labs its own internal Sales Order Number which the customer can quote if they have any inquiries. As a customer, it is nice to receive an Order Confirmation and I would consider this best practice today.

When would you use a Purchase Order?

Purchase Orders are used when a buyer wants to place an order and pay for the goods or services either on delivery or on agreed credit terms. This contrast with a online shopping, like checking out a basket on Amazon, where you pay at the point of placing your order.

From the suppliers’ perspective, it is generally better to avoid accepting purchase orders and instead ask customers to pay at the point they place their order. This improves cash flow and reduces significantly their credit risk and the costs incurred chasing up payment. It is not always possible however to pay at the point of placing an order with a supplier. In some industries, this is not the norm and customers expect anywhere from 30 days of credit upwards. At other times the nature of the purchase doesn’t lend itself to pre-paying. For example, for consultancy services or building work, where the Purchase Order is placed on a Time and Materials (T&M) basis. (See below).

As a side note, in some companies, you may find that even orders received via the company’s site and settled with a payment method such as a credit card still generate an internal purchase order with a status of pre-paid. Where company websites are used in the B2B (Business to Business, as apposed to B2C, Business to Consumer mode, there may be an option for the customer to enter a PO number for their own PO tracking purposes.

Example Purchase Order

This example shows the fields or data items you would typically expect to find on a purchase order.




Ship To:

PO Number:

Item DescriptionQuantityUnit PriceAmount


Terms and Conditions:

Authorized By:

Is a Purchase Order a legally binding contract?

A purchase order is a legal contract between the buyer and the seller. Be in no doubt that it should be treated as a legal document. The buyer is contracting to pay the agreed price and the supplier is contracting to supply the requested goods and services requested in the Purchase Order.

The supplier is not under any obligation to accept a Purchase Order from a Buyer unless there is a governing contract between the two organizations. This can take the form of an MSA (Master Services Agreement) or just a contract that captures the agreed trading terms for a period of time. 

If the supplier accepts a purchase order and delivers the goods and services in good faith it is enforceable like any other contract between two parties.

Suppliers should be careful when receiving Purchase Orders as they can sometimes have lots of additional terms and conditions on the back which would quite probably be enforceable. This is another reason for steering customers away from Purchase Orders and towards self-service web portals/websites where the supplier controls the terms and conditions. A simple alternative, if you don’t have a website, is to ask customers to place orders with you using your own Order Forms. These should set out your terms and conditions of supply.

Once the supplier has accepted a Purchase Order in some circumstances a customer may be entitled to seek compensation if the supplier failed to deliver the goods and services to the agreed schedule.

Does a purchase order have an intrinsic value?

Purchase Orders are valuable to suppliers. You may have heard people talk about having “a full order book”, this just means they have lots of Purchase Orders from customers to keep them busy. As long as the work is profitable it can be possible for the supplier’s business to use the signed Purchase Orders as evidence to help them secure a loan from a bank. This might be a loan to buy the materials needed to build 100 PCs. When the client pays for these the loan plus interest can be paid back to the bank and the supplier should be left with a profit.

Open Purchase Orders, for profitable business, also contribute to the value of a business if the owner is looking to sell. The potential net invoice value of open orders can be added to the current year’s turnover for valuation purposes. This can greatly improve the value when a large multiple is applied to calculate the total value.

What is a Time and Materials (T&M) Purchase Order?

If you are purchasing a service, such as a consultancy service or building work, the precise value may not be known when placing a purchase order. In this case, you may contract with the supplier on a Time and Materials basis. In this case, you should, preferably in an MSA (Master Services Agreement) have agreed on the day rates for the Time element. You can also include an estimate and an allowed tolerance. If you contract a supplier on a Time and Materials basis do make sure that you have a well-documented scope of work and success criteria. Also, consider the alternative which is a Fixed Price Contract.

What is a blanket order?

A blanket order is also known as a call-off order. Continuing the example above, Panadaware might not want all 100 PCs to be delivered at once. They might agree on a blanket order with Vulcan Labs for 100 PC’s to be supplied over the next 12 months. This fixes the price and specification. Thereafter as Panadaware need PC’s they will send a ‘Call Off’ order to Vulcan Labs for the PCs and they will be supplied against the blanket purchase order. Establishing a blanket order which is pre-authorized avoids the need to raise separate orders for each PC. This contrasts with normal one-time orders, or One Time Purchases (OTP) as they are sometimes known. Blanket Purchase orders are also known as Call-off orders and contract purchase orders/

What are electronic purchase orders?

This generally doesn’t mean emails but to more formal processes. Supermarkets and the likes of Amazon. operating in highly optimized supply chains, placing orders with their suppliers using EDI (Electronic Data Interchange) which involves TRADACOMS, EDIFACT and ANSI X12 standards. Although this may sound complicated it is just a way to capture the essential purchasing details in an agreed industry-standard format. This will include the earliest and latest delivery date, payment terms, their PO number, delivery address, the type of order and for each line on the order, a line number, expected price, discount, and the barcode (eg an EAN13). 

Some of these larger buyers are capable of sending draft or planning orders. These are intended to ensure a smooth procurement process, assisting the supplier to have the right stock in place ahead of receiving a firm purchase order. You will need to monitor these to see how accurate they are and apply scale-up / down factors as you see fit. 

In Europe, the PEPPOL standard is becoming well-established. This is like EDI but uses more modern standards. The use of PEPPOL is mandatory when supplying government contracts in some parts of Europe. For American buyers sending Purchase Orders using ANSI X12 EDI, you will hear them talk about sending you 850s. The 850 is just the standard number for the PO Document Type and it means Purchase Order. 

Why do you need a Sales Order (SO)?

In small businesses, it is conceivable that you might just receive Purchase Orders from customers and use these directly to fulfill the order and then raise an invoice or put the goods being supplied through your EPOS (Electronic Point of Sales) system.

In larger businesses, there will be a formal process for receiving a Purchase Order from a customer and for raising a Sales Order from it. The details will vary from company to company but the basics are the same. 

As businesses grow in size auditors will place ever more importance on the Purchasing Process, which is the financial commitments a business is making, and the Sales Order Processing processes. With Sales Orders, Audit will want to be sure the business is not taking undue credit risk, it is invoicing for everything being supplied, and it knows who the customer is and has verified their identity.

Purchase Order Process Workflow

An example Purchase Order Approval Process / Workflow
An example Purchase Order Approval Process / Workflow

Budget Approval

A purchase order should be raised against an existing op-ex (operating expense) budget line or against a capex (capital expense) project. Budgets for both of these should be agreed in advance as part of annual business planning.

Purchase Requisition Form

In some businesses purchasing is handled by procurement staff in the purchasing department or procurement department. In this case, you would complete a Purchase Requisition Form and they would carry out the purchasing process detailed below for you.

Request Quotes from Potential Suppliers

You will normally need quotes from three suppliers. You may be able to use price lists, and price files rather than going out to three suppliers each time. This can also be helpful in establishing the current availability and lead time. This is quite important as the availability and price of some items vary greatly depending on market conditions. You may sometimes be able to justify paying a supplier more in return for a shorter lead time or a returns allowance for any stock you don’t use.

In some cases, you may have an agreement to use a single vendor for some products and services. If this is the case it should be reviewed as a minimum on an annual basis and come with some significant benefits to the business. 

Raise the Purchase Order Request

You will either raise this in an ERP, Accounting System or specialist Purchase Order Software, use pre-printed purchase order pads or use a purchase order template. Each purchase order must have a sequential purchase order number. The purchase order needs to detail any special financial terms,the earliest and latest allowed delivery dates, delivery address and the list of items giving the vendor’s product codes, a clear description of the item, purchase price and quality and any other relevant details. The PO should also include instructions to include the PO Number on their sales invoice and any other related correspondence and who they should send the final invoice to in your finance department.

Purchase Order Approval

There may be multiple levels of Purchase Order Approval. For example, a purchase order below £25,000 may be approved by the head of the department, purchase orders above £25,000 also need the approval of the CFO (Chief Financial Officer) and purchase orders over £250,000 require board approval. If you are using a software system to raise purchase orders this approval workflow will happen automatically. 

Send the Purchase Order to the Supplier

The Purchase Order is now sent to the supplier. This might be an email attachment or you might consider using something like DocuSign.

Receive Order Confirmation

The supplier needs to come back to acknowledge receipt of the purchase order. At this stage, they should give you their Sales Order Number so that you can chase up the order if necessary. They may also ask you to confirm acceptance of their terms and conditions of supply using DocuSign or similar. As part of your purchase order tracking process, you should have a procedure for chasing up suppliers who have not formally acknowledged a purchase order in a reasonable period of time, somewhere between 3 and 7 days, depending on the urgency and typical cycle times involved.

Goods Receiving

The goods or services have now been delivered. It is essential at this stage to check off what has been delivered against the delivery paperwork and your purchase order. If anything is missing or damaged, you need to raise a timely claim against the supplier for the shortage. If there are any additional items or overages I recommend you have a policy of reporting these to the supplier and asking them to arrange collection at their expense. Most of the time they won’t bother to collect, but being upfront like this means they don’t have any grounds to try and invoice you for these overages later.

Invoice Matching

The invoice goes through what we call a three-way match process within your accounting department. This means we check we are not being invoiced for more than we receive or more than we ordered, and likewise, we are not being asked to pay more than we agreed to on the purchase order. Any discrepancies should immediately be claimed. If the supplier has failed to quote your purchase order number on their invoice it will make matching harder. You may want to return the invoice and ask them to resubmit it with your purchase order number.

Also, see my article about Invoice Reconciliation Processes

Invoice Payment

Once the invoice has been matched against the goods received and the purchase order it can be scheduled for payment. If a credit period has been agreed upon as part of the purchase then payment may be delayed until the due date, to maximize the use of this credit period to help cash flow. Most companies have a weekly or monthly payment run.

When the invoice is paid it is best practice to send a remittance advice note to the supplier quoting their invoice number and the value of the payment.

Sales Order Processing Workflow

Sales Order Processing Example Workflow.
Example Sales Order Processing Workflow

Customer Identification

We need to identify who the Purchase Order is from. If the PO is from an existing customer we can enter the PO into our Sales Order Processing System (SOPS) against their account. Even if it is an existing customer you may need to identify the branch or site where the order is to be delivered to. For example, Amazon has a number of distribution centres, so while the Purchase Order might be from Amazon, the order may be for delivery to one of their distribution centres you have delivered to before.

New Customer Onboarding

If the Purchase Order is from a business you have not supplied before you will need to verify that you want to do business with them and if so on what basis. 

For new customers, it is not unreasonable to ask them to provide two trade references and a bank reference. You might also want to only deal with businesses that are registered for VAT or Sales Tax as this helps to identify who they are and ensure they are bonafide businesses. 

Large suppliers often work with credit insurance agencies who will say if they are willing to cover the credit you want to extend to the organization involved.

Even after all these checks, it is not unusual to insist that the first order is pre-paid to ensure there are no payment issues. This in particular also helps protect against a customer that is trying to buy from you for the first time because they are having financial difficulties and are on credit stop with other suppliers.

Sales Order Creation / Sales Order Entry

In a small business, this may be as simple as transcribing the details from a customer purchase order onto your internal document/sales order form. Most businesses these days have some level of computerization and software in place to manage the sales and invoicing processes. In this case, it is a data entry task to take the details from the customer’s purchase order and enter them into the Sales Order Processing System (SOPS).

The Sales Order Processing System will issue a Sales Order Number (SO or SON), record the date on the PO (the Purchase Order Date), the customer Account number, the customer purchase order number, the earliest and latest delivery dates, the details about what is being ordered, often known as SKU’s (Stock Keeping Units), any prices, special terms, contact information. 

Some customers in addition to giving each PO a number will also give each line a PO line reference. Please see below why PO Numbers and PO Line References are so important. 

The process of taking the details from the customer’s PO and entering them into the SOP is subject to human error. Good SOPS will also capture a scan of the original purchase order document as this may be needed as evidence if there are ever any disputes with the customer. Most errors can be caught quickly by asking the customer to verify the Sales Order Confirmation.

Credit Checking / Credit Control

Now that the PO has been captured for the existing customer it will go through a Credit Control or Credit Approval Process. This is to ensure we don’t ship goods to a customer who already owes a lot of money and where their account may be in dispute. Credit control also makes sure that a small customer can’t suddenly try and make a large purchase that may be beyond their means to pay. Credit control also tracks the sum of the open purchase orders for a customer, as lots of small orders can quickly add up and take an account over its agreed credit limit. 

Sales Order Confirmation

It is best practice to send a confirmation that the PO has been accepted along with a confirmation of the terms and conditions covering the sale of goods and services, the next steps, your Sales Order Number, and the customer’s PO Number. As discussed above, you should also include some wording to request that the customer should check the details and who they should contact if there are any discrepancies. 

Production Planning / Scheduling

Depending on the nature of the business there may be a Production Planning or Scheduling department. They may need to organize the purchase of raw materials to allow the order to go into production or to book a production slot in the factory. For professional services, the scheduling of resources also needs to happen, to ensure that consultants are not double booked.

Fulfilment & Invoicing

The goods which have been ordered are picked and packed and a sales invoice is generated. The sales invoice must quote the customer’s original PO number or there will be a delay in paying and it will be harder for the customer to goods receive the delivery. 

There is often a final credit check just prior to despatch to ensure the account is still in good standing before goods leave the factory gate.

The parcel is handed over to a delivery firm which will provide tracking numbers for the parcel. These should be recorded against the Sales Invoice for tracking purposes. 

Despatch Confirmation / Electronic Delivery Note (EDN)

It is best practice to send a despatch confirmation with the parcel tracking numbers. Larger customers may want an EDN, which is an electronic delivery note which their Goods Reception staff can scan deliveries into stock against. 

Proof of delivery (POD)

When the delivery company delivers the parcel they will ask someone to check the parcel and sign for it. This information should come back to the supplier and be stored against the sales invoice and sales order. It is useful if the customer tries to chase an order which has already been shipped.

Sales order vs Purchase order vs Invoice

As we have seen above the Purchase Order is the customers document to the supplier requesting goods and services. If the supplier accepts this opportunity they will raise an internal Sales Order to allow them to fulfil the customers request. When this has been completed they will raise a legal Sales Invoice which will be issued to the customer for payment.


It should be clear that when considering Sales Order vs Purchase Order they are two sides of the same coin. The Sales Order is produced by the company selling the goods or services and the Purchase Order is created by the company that wants to buy the goods or services.

If you do have any questions please leave your questions / comments below and I will do my best to reply to you.

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