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|
|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.|
|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|
|Effect of acceptance||Sale creation||Sale confirmation||Sale contract|
|Legal validity||Not legally binding agreement||Legally binding agreement||Legally binding agreement (once accepted)|
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.
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Are you a small business owner? Read about the best accounting software solutions for small businesses and accounting for a small business.