The accounting side of any business can be complicated for anyone who may be new to any sort of payroll task and issue.
One thing is getting your head around the different types of invoices that can be issued when organizing a deal with a client or customer during the sales process.
You may have heard of a sales invoice, a tax invoice, a commercial invoice, or even a retainer invoice. These are all commonly issued at the end of a process.
But what can you issue if the details of a transaction are not yet final, or to give a customer an idea of what the final deal will incorporate? A preliminary invoice type when selling goods or services is a proforma invoice.
Whether you’ve heard of this type of invoice before or not, throughout this article, you’ll be learning the ins and outs of what a proforma invoice is, when it is used, and how to create one.
What is a proforma invoice?
A proforma invoice is a type of invoice or bill of sale that is sent to a buyer before a delivery of purchase has been made. It is also commonly written as "pro forma".
It includes a general estimation of what will be included as part of the order, including other important information related to any fees, logistics, and important information of the parties involved.
When a proforma invoice is issued, it means that not all the details of a deal are finalized or officially signed off. It is a communicative tool that outlines some already predetermined expectations between a seller and a buyer.
The customer must then agree to the price and terms indicated on the proforma invoice sent to them.
You may be thinking that this sounds like a quote, rather than an invoice. Technically speaking, a proforma invoice is a quote, just in invoice form, but with three differences:
1. The relationship between seller and customer is already established, which means that payment is to be expected from the seller.
2. 90% of the details of the transaction would have already been communicated,
3. A proforma invoice is formatted as a final invoice (see below).
Why would you use a proforma invoice?
A proforma invoice is used during the sales process for goods that are being bought and then delivered to a buyer.
If payment will be required upfront for any goods or services, it also prompts the buyer about the pricing details of the forthcoming transaction. In this case, most of the details relating to the transaction will have been agreed upon prior to issuing the proforma invoice.
Proforma invoices are useful to get preliminary confirmation from the buyer to seal the deal. From this confirmation, an official invoice can be forwarded, requesting official payment from the buyer.
When is a proforma invoice issued?
A proforma invoice will be issued as a preliminary bill that includes details that are already discussed between the buyer and seller. This is in the lead-up to a final sales invoice being issued.
The reasons why and how a proforma invoice is issued can vary based on industry needs. Here are some real-world examples of when a proforma invoice is issued.
Examples of the use of a proforma invoice
In the manufacturing industry:
It gives the manufacturer and the buyer an idea of quantities, costs, and surcharges before a product is produced. It ensures that an agreement is made before any actual production of goods takes place.
In the international imports & exports industry
It is used as a shipping document for customs purposes in the international import and export of goods. Pro forma invoices can be used to conduct a general inspection of imported goods and calculate duties. Remember that customs vary from country to country, sometimes companies might need to submit additional documents and certificates while exporting/importing.
How is a proforma invoice different from an official invoice?
It is important to understand that a proforma invoice does differ from an official invoice. Let’s go through these differences below.
Proforma invoices also differ from other variations of invoices such as commercial invoices. They do commonly get attached to these official invoice types at the final stages of the sales process.
How to create a proforma invoice?
There are no actual laws or explicit rules on how a pro forma invoice should look. However, it is common for a proforma invoice to share many details that a typical invoice that requests payment incorporates.
This means you can easily use a pre-existing invoice template and modify it to suit the standards required for a proforma invoice.
Below we’ll go through the important details required to be included on a proforma invoice.
Information required for a proforma invoice
Some important details that you will find on a pro forma invoice include:
- The term "Proforma invoice" or "Pro Forma Invoice"
- The unique proforma invoice number (this may differ from the final invoice number to differentiate the invoices)
- The seller's name, address, and contact information
- The buyer's name, address, and contact information
- Date of issue and the due date
- A description of the goods or service being supplied (weights and dimensions of products)
- The price validity date
- Currency used
- Terms of sale
- Payment terms (when the final payment is due, how it should be made etc)
- VAT or valid taxes
- Signature of company representative or company stamp
For international exports, you’ll commonly find:
- Shipping details (shipping costs and insurance)
- Expected shipping date
One crucial phrase that all pro forma invoices should include is "This is not a tax invoice" or something along these lines. This ensures that this invoice will not be used for a purpose that it is not intended for and differentiates it from commercial invoices or a final sales invoice.
The key thing to remember about proforma invoices is that these documents are mainly used for quotation purposes. However, the details of a transaction will have already had some discussion between a buyer and a seller.
Now that you have come to the end of this article, you should be well aware of how a proforma invoice differs from other invoicing types and whether they will be useful in your business.
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Are pro forma invoices legally binding?
Can pro forma invoices be used for accounting purposes?
Can pro forma invoices be canceled once they have been issued?
Are taxes (VAT) included on a pro forma invoice?
What industries commonly use pro forma invoices?