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Proforma Invoice – What is a Proforma Invoice?

What Is a Proforma Invoice?

Proforma InvoiceA proforma invoice is a preliminary bill of sale.  It is sent to buyers in advance of a shipment or delivery of goods. The invoice will typically describe the purchased items and other important information.  This includes items like the shipping weight and transport charges. Proforma invoices often come into play with international transactions.  They are often used for customs purposes on imports.

Proforma invoices are sent to buyers ahead of a shipment or delivery of goods or services.  Most proforma invoices provide the buyer with a precise sale price. There are no guidelines dictating the exact presentation or format of a proforma invoice.  A proforma invoice really only requires a limited amount of information.  Enough to allow customs to determine the duties needed after a general examination of the included goods.

Proforma applies to invoices that are not considered complete. They do not include an invoice number that is needed for every legal invoice. As such, a proforma invoice is often used as an estimate or a quote.  It lists the price and identifies the goods and services that a seller commits to selling.  It is sent before work is completed or the goods are delivered. The purpose of this document is to ensure the seller and customer are in agreement on price and services.  It gives prospective clients a preliminary overview of the cost, the products, the services, and why.

What is the Purpose of a Proforma Invoice? 

A proforma invoice is a preliminary bill of sale.  It is sent to the client before the work is completed. It’s a commitment to goods or services that have yet to be delivered. It lists the work to be completed, the quantity, and the price for the products or services.  The proforma is not an actual invoice.  As such, it is not intended for accounting purposes or payment by the client. It is not a demand or request for payment. Instead, a proforma invoice is commonly used for advanced notice or for customs purposes on imports.

The purpose of a proforma invoice is to streamline the sales process. By sending the proforma invoice, the customer is on notice regarding price and delivery for goods or services. Instead of being a demand for payment, proforma invoices are good faith estimates.  They let the customer know in advance exactly what to expect.  Here are some of the other uses of a proforma invoice:

  • To declare the value of goods for customs for a smooth clearance and delivery process.
  • Notification of price and delivery – A Proforma invoice is convenient for advance notice.  But, when you don’t have all the details required for a commercial invoice.
  • Internal purchase approval – Some clients use it for an internal purchase approval process

How a Proforma Invoice Works 

A proforma invoice differs from a simple price quotation because it is a more binding agreement.  It identifies the goods to be provided, the quantities, and the price.  Yet, it allows for the terms of sale and delivery to be subject to change. Businesses in most industries use pro forma invoices to satisfy their internal purchase approval process. Pro forma invoices also streamline the sales process.  They eliminate much of the back-and-forth after a sale goes through.  This is because key terms have been identified to and agreed to upfront.

Most proforma invoices provide the buyer with a precise sale price. Also, it includes an estimate of any commissions, fees, applicable taxes, or shipping costs. Although some terms may be subject to change, it represents a good faith estimate.  As such, it avoids exposing the buyer to unexpected and significant charges once the transaction is final.  A firm will usually send a pro forma invoice before shipping the actual agreed-upon goods. While it does contain exact cost details associated with the sale, it is not an official demand for payment. No guidelines dictate the exact presentation or format of a pro forma invoice.  They vary by company and industry. Therefore, they may or may not resemble other commercial invoices.

International Customs Clearance

Specific documentation is required before goods can pass through customs in the U.S. A traditional commercial invoice must list substantial information.  This includes the buyer and the seller, a description of the goods, the quantity, the value for all the shipped items, and the location of the purchase.  A pro forma invoice requires only the information necessary.  It should allow customs to determine the duties needed from a general examination of the included goods. If a firm uses a pro forma invoice for customs, it must present a commercial invoice within 120 days.

The Difference Between an Invoice and a Proforma Invoice

On the surface, proforma invoices and commercial invoices have quite a lot in common. They’re both used largely in the same way.  Ultimately, they both provide information about a sale. Where they differ is in their purpose.  You should issue a proforma invoice to create a potential sale and an invoice when that sale is finalized.

  • Proforma invoice – A proforma invoice is also sent to a customer before your products are delivered or your services provided, but it is considered more binding than a quotation – although not legally binding like a completed invoice.  More detail is provided, and there is room for flexibility in terms of negotiation before any payment is made.
  • Invoice –  Invoices are sent when goods have been sold or services rendered and the payment is now due. The document is a binding agreement, and the customer has an obligation to pay the price stated. And unlike with proforma invoices, you can use invoices to reclaim VAT.

Can Payment be Made on a Proforma Invoice?

A proforma invoice is not a demand for payment.  However, sometimes a client’s accounts payable department may issue payment in advance against a proforma invoice. The final commercial invoice avoids any misunderstanding as to what and how much is owed.  Once the job is completed, a reference can be made on the commercial invoice.  This will help to avoid any duplication of payment by the client.

What Should a Proforma Invoice Look Like?

There are no specific requirements regarding the structure of a proforma invoice. But, it’s easier and safer to have it resemble the structure of the final commercial invoices your company creates.  Proforma invoices generally include:

  • Date – The date of issue
  • Buyer and seller – Contact details for both the buyer and the seller
  • Goods and services provided – Details of the goods or services provided and their agreed prices
  • Taxes and fees – VAT and other applicable taxes
  • Shipping costs – f any
  • Total price – The total amount due for listed goods and services provided

What does Proforma Mean?

Latin for “as a matter of form” or “for the sake of form.”  A pro forma financial statement is based on certain assumptions and projections.  This differs from an actual financial statement based on specific and documented events.

Proforma Invoice – Example of Use 

If the parties have already completed a sale, a commercial invoice is used to document it. If the transaction is not yet complete, the selling firm may use a pro forma invoice. A firm may use a pro forma invoice if the sales contract specifies that full payment is not due until the buyer receives certain goods. 

For example, a bakery customer might agree to the price of a cake on the pro forma invoice.  Yet, the baker will only deliver the cake once it is ready. The customer then pays when the cake arrives and the invoice is received. The final invoice amount should be the same or close to the amount on the pro forma invoice.

Proforma invoices are not always necessary.  But, they can be used as a meaningful part of your sales process. A proforma invoice is similar to both a quotation and an invoice.  But, it serves its own unique purpose and can easily be created and used.

Up Next: What is Commercial Property?

Commercial property is real estate that is used for business activities. The designation usually refers to buildings that house businesses.  But, it can also refer to land used to generate a profit.  Also, it includes large residential rental properties.  The designation of a property as a commercial property has financial implications.  It can influence how it is financed, how it is taxed, and how laws are applied to it.

Any property that is zoned or used solely for business purposes is a commercial property. This may include shopping centers, strip malls, hotels, retail stores, warehouses, restaurants, industrial spaces, farms, office buildings.  Even vacant lots can be commercial property if they have been zoned as such by a local government.

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