Often enough, the term Sales order is thrown around next to the likes of purchase order and invoice. But how is the sales order different, what exactly is it and what should you know about it? We’re here to help answer all of these questions and help you better understand the very basics of this important topic.
The basics of sales orders
To begin with, a sales order is always in the form of a document that creates a link between sellers and buyers. The sales order is similar to invoices and other orders in a way that it recognizes the fact of a sale. This document is issued by the seller and given to the client (buyer). Within the sales order, you will find details related to the objects (goods and/or services) included in the transaction. But wait… Isn’t that just what an invoice is?
Well, not exactly. Even though the vendor/seller generates both invoices and sales orders, they are quite different documents. In reality, a sales order is more linked to the document called Purchase order and is usually generated alongside it. But, whereas the purchase order is sent from the client to the vendor, the sales order works in the complete reverse order. Usually, the sales order is generated after the client sends a request to purchase something from your business.
So, in short, the sales order is a document, generated in response to a purchase order, made by your clients. It’s sort of like a quote, but not entirely, as sales orders are usually handed out together with legally binding long-term agreements between suppliers and their clients or in similar long-term business agreements.
How is a sales order different from an invoice?
First off - invoices are similar, but not the same as sales orders. Even though they might disclose the very same information within them, they’re delivered in entirely different phases of a business transaction.
The sales order comes first. Since it is usually generated alongside a contract for supply long-term, it’s easily deducible that a sales order is created before the fact of the purchase. Thus, a company can make a large purchase order, sign a supply contract for a fixed quantity of goods per month, let’s say 10 tons of apples monthly. After this contract goes into effect, the seller has the time to assemble, procure or gather 10 tons of apples and ship them to the buyer. This also leads us to yet another difference between the two documents. A sales order is usually filled with expected or guaranteed order fulfilment dates.
On the other hand, a quote is generated after the transaction is completed. So, a sales order comes first, then the order is fulfilled, and only after the apples are delivered, the invoice will be sent.
Why are sales orders important?
These documents highlight and display the financial well-being of your organization. They can show future cash flow figures and help plan out your quarterly strategies better. By creating and generating sales orders, manufacturers and other businesses are able to keep track of their future commitments as well as their accounts receivable.
Instead of being bound to verbal agreements, which aren’t legally binding, companies can put up sales orders and automatically guarantee order fulfilment in exchange for payment sometime in the future. The information put in the sales order is super important as well. Companies that sell and manufacture a lot of products can keep track of their best-sellers, notice the most efficient employees, etc. There are also legal obligations that enforce you to keep track of such documents. These obligations are usually drawn up by your local tax authorities.
In case of disputes and/or disagreements with your clients, sales orders play a huge role in resolving them in or out of court. As the order displays mutual agreement on the terms of the transaction, this helps sway the decision to the benefit of your company rather than the customer.
If you can keep track of everything, it means that your financial data is in order and won’t artificially deflate or inflate important figures like profits, revenue, etc.
How to track sales orders and what is the best software for sales order management?
It’s crucial to have the right software and tools for sales order generation and management. To begin with, sales orders are usually generated by your staff and/or sales reps. They should have access to an editable template or utilize their own digital resources to get the job done.
So, after the terms are agreed upon, and the quote is approved by the client, your staff can insert the data into the template and create a new sales order document. Templates are easiest done within Excel, but for a larger organization, tons of Excel sheets are quite messy to handle. This is why it may be best to use dedicated accounting software. It’s going to keep a neat record of your past operations whilst giving flexibility for editing and alterations. You can hire a graphic designer or use free resources online (e.g. the likes of Canva) to create a visual template. If your software allows, you can import that template and make it interactive for the accounting software. This will help your business generate reader-friendly and very clear-cut sales order documents.
So, as you have read, the sales order is a document that confirms the intent of the customer and the seller to exchange money for goods and/or services. The sales order is generated by the seller and contains pretty much the same information as the invoice. But, whereas invoices are handed out in the last phase of making the deal (after the goods have been delivered), the sales order is sent earlier. The document will usually contain important data on deadlines and expected delivery dates.