What’s the Difference Between a Sales Order and an Invoice?

While most small business owners have strong organizational skills, it can be hard to keep track of all the different documents flowing in and out of your business. But knowing each document’s purpose and when to use it is key to keeping your business accounting records in order.

This, in turn, will make running your business that much smoother. In this guide, we’ll run through the differences between sales orders and invoices, so you know how each one will factor into your business’s operations. Let’s get started.

Sales Order vs. Invoice

When comparing sales orders and invoices, you’ll find that some people use the terms to mean the same thing, but they’re actually two distinct documents used at different times during a transaction with a customer.

However, both documents are used during transactions with customers and include basic information for both the customer and the business. Let’s take a closer look at how each document functions.

Sales Order

A sales order is a form that a customer can use to initiate or request a sale. In general, the sales order is filled out by the customer to order certain products from a business. The customer pays for these products when they submit the sales order. This document represents the promise that the requested goods will be ordered by the business and delivered to the customer later. 

When the goods are fulfilled and picked up by the customer, the sales order is used as a receipt to make sure the correct amount and types of products are given to the customer.

In simple terms, a sales order is a request from a customer for specific items. 

Invoice

You’re likely more familiar with the invoice, which is a form filled out by the business and given to a customer to request payment. Generally, the invoice is sent to a customer after the product or service has been rendered or delivered. The invoice is a signal that the transaction is completed and it’s time to pay.

While invoices are generally sent after the completion of a transaction, they can be sent at regular intervals during long projects. For example, a freelancer working on a large project that will take six months to complete may send the client invoices monthly, as they hit project milestones. In general, invoices are used for service businesses, but can also be for product-based businesses. 

Sales Order vs. Invoice: The Differences

To understand the distinctions between sales orders and invoices, you need to know all the differences between these two useful business documents. From purpose to timing to type of business, there’s a lot to go over.

1. Purpose

One of the main distinctions between the sales order and invoice is the purpose of each document. 

A sales order is an internal document used by the company to track orders and to resupply their stock for orders that customers have placed. Sales orders help the business to better regulate their inventory and make order fulfillment more efficient.

In comparison, an invoice is essentially a receipt for services rendered. It’s used to communicate with the customer that payment is expected, as well as keep track of payments owed in your internal accounting records.

2. Timing

One of the simplest differences between sales orders and invoices is the timing. A sales order is created to start a transaction—a customer wants to buy something. An invoice, on the other hand, is created to end a transaction—the products or services have been delivered to the customer and now payment is needed. 

While sales orders often indicate that payment took place before the goods were delivered, depending on how your business operates, you may allow your customers to pay at the time of order fulfillment, in which case the sales order will come before the invoice. 

3. Accounting Records

Another important distinction to understand about these two documents is what they mean for your accounting records.

A sales order is an internal document that communicates what goods need to be ordered. If payment is submitted along with the sales order, then this would be recorded in your accounting books. If payment is only to be submitted once the order is fulfilled, then you may not enter your sales order into your accounting records, as it doesn’t represent any financial transaction yet.

On the other hand, an invoice should always be recorded in your accounting software or ledger. Invoices always indicate a financial transaction, and entering all of your invoices into your accounting records will ensure you know what payments are still outstanding, if you’ve been paid the correct amount, how much revenue you can expect in the coming weeks or months, and more. 

4. Action Required

Sales orders and invoices signify a different action that is needed. A sales order tells the company that they have work to do to fulfill the order. Additionally, an annual review of sales orders can help you to better understand how much inventory you should carry in the future.

In comparison, an invoice signals to a customer that payment is expected. Action is needed by the customer in the form of sending payment.

5. Goods vs. Services

While not always the case, there’s another potential difference between a sales order and invoice.

Most companies that deal with goods will use both sales orders and invoices. On the other hand, a company that provides services generally doesn’t use a sales order. They simply provide the customer with an invoice after services have been rendered.

What to Include on a Sales Order vs. Invoice

Another helpful way to understand the differences between sales orders and invoices is to know what information will be included on each document. Both documents will have a lot of the same information: company name and contact information; customer name and contact information; information on the product or service rendered, including type, amount, cost, etc.; sales tax and additional fees; any discounts; and payment terms.

However, as each document serves a different purpose, there is also some information that will be unique to just one. 

What to Include on a Sales Order

In addition to the information listed above, a sales order may also include:

Customer Shipping Information

If you will be sending the goods to the customer, rather than having them pick up in-store, then you’ll need their shipping address. You’ll also want to include any shipping fees, if applicable.

Deposit and Balance

If you’re asking the customer to put a deposit down on their sales order, then you’ll include this information at the bottom. A deposit is common on large purchases and gives you a guarantee that the customer will pick up and pay for the items they’re ordering.

If a deposit is put down, that information should appear on the sales order. Once the deposit is calculated, then subtract it from the total and note the leftover balance that will be due upon the delivery of the products.

Room for Signatures

If the customer is agreeing to any terms and conditions, they must sign the sales order to ensure that it’s a legal and binding document. Your sales order should leave room for signatures from your company representative and the customer.

What to Include on an Invoice

An invoice will also include the following information:

Unique Number

Because an invoice will be part of your financial records, each one needs to be distinct and identifiable. To do that, each invoice should be given a unique tracking number. You can determine your number system or if you use accounting software, this number will typically be generated for you.

Itemized Description

Since invoices are typically more popular for services, whereas sales orders are typically for products, you may want to get more specific on your invoice in terms of what services were rendered, a description of service, total hours, etc.

Supply Date

The supply date is the date on which the products were issued or the services rendered. The supply date is likely to be different than the invoice date. 

Invoice Date

The invoice date is the date on which the invoice was generated. This is most important for your internal records and less important to the customer.

Due Date

One of the most important pieces of information to include on an invoice is the payment terms and the due date. The payment terms will include any terms and conditions, including late fees. While you will want to agree to these terms with your customer before the invoice is issued, they should still be included in this document so there’s no confusion. As well, you want to have the due date for payment displayed prominently.

Accepted Payment Methods

You will also want to include information about the payment options the customer has. For example, cash, check, and credit card are all possible payment methods, and you’ll want to make sure your customer knows their options.

The Bottom Line

If your business uses both sales orders and invoices, it’s important to understand the differences between the two and when each one comes into play. 

When a customer wants to request goods from your business, they’ll submit a sales order. And when you want to collect payment for goods or services that were fulfilled, you’ll send them an invoice.

Keeping these documents straight will help ensure both happy customers and an organized accounting system.