Pro Forma Invoice: What Is It, Its Meaning, and How To Create It

We tell you what a proforma invoice is, when and why it is needed, what information must be in the proforma invoice, and how it differs from the invoice and purchase order

A pro forma invoice is an essential brick of the invoicing system that brings you closer to the end goal: getting paid. Achieving this keeps the cash flow coming into your business. That’s why it is crucial to understand different types of invoices. What’s more, invoicing helps you oversee your earnings and expenses and feel confident when the tax period is about to start. So, let’s get everything straight about this document once and for all.

What Is a Pro Forma Invoice?

The question "What is a proforma invoice?" has a simple answer: it is a prototype based on which you create a regular invoice. It provides information about the goods or services a supplier/retailer will deliver to the buyer/customer. In it, you can find details regarding how much particular goods or services cost, as well as the estimated amount of any commissions, taxes applied to the deal, shipping costs, the weight of goods, etc.

While a proforma invoice may include some of the same information as a formal commercial invoice, it is not considered a legally binding document for tax or legal purposes. This is because a pro forma invoice does not actually represent a sale or transaction that has taken place, but rather an estimate or quotation for a potential sale.

A pro forma invoice does not have to be signed, but usually the seller signs the document as evidence of the agreement between the buyer and seller. The signature serves to confirm that the seller has provided an estimate or quotation of the costs associated with the transaction and that the buyer has agreed to the terms and conditions outlined in the pro forma invoice. In some cases, a signed conditional invoice may be required by customs or other authorities to verify the details of the transaction.

When Do You Need a Pro Forma Invoice?

A pro forma invoice is issued for the goods that the customer has already partially paid for - as well as for uncompensated items, including humanitarian aid, exhibition samples, etc. For example, a seller sends a pro forma invoice if a buyer asks them to create a document for products or services yet to be delivered. So, it is issued prior to the issue of a regular invoice. International shipping often brings pro forma invoices into play for importing goods at customs.
Reasons for issuing a pro forma invoice:

To state the estimated sale price of products or services that haven't been delivered or provided yet
To give the customer precise information on what products they will receive and by what time, as well as what their value is
To guarantee the supplier's obligation to the customer about shipping the goods or providing the described services at agreed-upon prices
To declare the value of goods for customs to ensure a smooth delivery process
To move forward the process of sale creation when there is not enough information for issuing a commercial invoice
To finalize the internal purchase approval process for some customers

Also, you can amend the details of the pro forma invoice if necessary in these cases: The buyer asks for a discount after finding the prices too high.

The buyer finds the delivery date specified by the supplier unacceptable and demands a closer one.
The buyer may request an urgent delivery, which means a change in the mode of transport.

What Information Must Be Included in a Pro Forma Invoice?

A pro forma invoice should include the information listed below:

Date of issue
Name and address of the seller
Name and address of the buyer
Product name and description of each type (model, article number)
The number of units and the weight of the goods
The price per unit of cargo
The total cost of the goods
VAT (may not be mentioned if the tax is zero) or any other applicable taxes
Terms of delivery
Suggested terms of payment (if any) and sale
Signature by a legal representative from supplier's company

It is important to note that the pro forma invoice does not have an invoice number because it is not a finalized invoice. And since a pro forma invoice is not a real invoice, you should enter it into the books only after creating a regular one. Read our article "How to Write an Invoice Properly" on how to make an invoice.

Keep in mind that the customs of some countries might require specific certifications for the goods to cross the border. But pro forma invoices only require sufficient information for customs to conduct a general inspection of goods and calculate the required duties. However, depending on the country, a company might need to submit a commercial invoice within a stated period of time if it uses a pro forma invoice for customs.

When it comes to the format of a pro forma invoice, there are no strict rules. To create a proforma invoice, you can use a standard invoice template including the same layouts, images, and logos.

Benefits of Pro Forma Invoices

While some may consider issuing a pro forma invoice to be optional, it brings concrete benefits:

You get all the details written out, providing your customer with a lot of relevant information. All prospective terms and prices are in one place for both parties of the deal. But some final terms like the due date or an invoice number are absent, waiting to be stated in a regular invoice. Also, pro forma invoices may serve as a notification for the customer about the expected delivery date.
Pro forma invoices make sure that both the buyer and seller are on the same page and ready to fulfill their obligations. You might also need a pro forma invoice for creating a quote or purchase order for your customer so that they can get the sale approved and the final invoice paid.
Pro forma invoices are of great help when something goes wrong or is different than planned.
If the goods get damaged in transit, the typical routine would be to send your customer a credit note against the original invoice. But having a pro forma invoice lets you make any necessary amendments and then turn the document into a full sales invoice.

Let's take another scenario: the customer decides to amend their order after you have already sent the delivery. In this case, you have to re-issue or credit the initial invoice since it will be incorrect. Pro forma invoices will save you from extra work since they can be easily updated and converted to a full invoice.

If we're talking about providing services, and you realize that the project scope is larger than you thought, you must send additional invoices to the customer. Using a pro forma invoice helps you finalize the sale when the full scope is clear and agreed on by both sides.

Differences Between Invoices, Pro Forma Invoices, and Purchase Orders

Basis for comparison	Pro forma invoice	Invoice	Purchase order
Definition	A pro forma invoice contains information about the goods or services which a supplier/retailer will deliver to the buyer/customer.	An invoice is a commercial document issued by the supplier to the buyer; it consists of the details of goods or services provided to them and informs the buyer that payment is due.	A purchase order is a document that the buyer issues to the supplier; it details the list of goods or services they want to purchase.
Purpose	To help the buyer decide whether to place an order or not	To inform the buyer about the day of payment	To place an order
Time of issue	Before the goods or services are provided	Before the supplier receives the payment	After receiving a quotation
Issued by	Supplier	Supplier	Customer
Issued to	Buyer	Buyer	Supplier
Effect of acceptance	Sale creation	Sale confirmation	Sale contract
Legal validity	Not legally binding agreement	Legally binding agreement	Legally binding agreement (once accepted)

Read more about the differences between financial documents in our articles "PO vs. Invoice" and "Invoice vs. Receipt”.

Takeaway

As you see, pro forma invoices are not always necessary. But they do give some advantages in negotiating the deal even though there are similarities with other types of financial documents. A pro forma invoice still has its unique function that can make running your business a smoother ride.

The world of financial documents is pretty complicated and can baffle even the most experienced entrepreneurs, but Finom can make things much easier. We provide a wide range of financial services, including a business account, invoicing, and accounting software integration. Using invoice software will keep your workflow fast and straightforward. You can edit an invoice directly in the web and mobile app (Finom for Android, Finom for IOS) and download it in PDF and CSV formats.

Finom has different plans for business owners of any scope. Whether you have a small business or you are a freelancer, Finom's Solo € 5 plan can make your workflow easier by providing different functions, such as multi-banking and its own bank accounts with a local IBAN. If your company is undergoing the registration process but you are a resident of Germany, you can still open a Finom account without waiting for the process to finish.

Are you a small business owner? Read about the best accounting software solutions for small businesses and accounting for a small business.

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