As a business owner, you might have come across the concept of a proforma invoice. So what is a proforma invoice? Keep reading to discover the definition and what they include, the difference to standard invoices, and examples.
What is a proforma invoice?
A Proforma invoice refers to an invoice that is issued and sent by the seller before the product or service in question has been delivered. They are invoices not yet completed, essentially an estimate or a quote that outlines the goods and services that a seller commits to selling.
Proforma invoices are often used to send buyers a detailed overview of their purchase, before creating an actual invoice. It can help ensure that seller and buyer are on the same page about the agreement (on eg price of the goods and services). A proforma invoice also gives prospective clients an overview of the cost of products and services provided by your company.
Proforma invoices can help streamline the sales process. Once you have issued and sent a proforma invoice, the customer agrees to the price and then you provide them with the goods or services. They are also frequently used to declare the value of goods for customs for a smooth delivery process, for internal purchase approvals, and when you do not yet have all the details required for a commercial invoice.
What is the difference between a Proforma Invoice and an Invoice?
- Purpose: A proforma invoice, as opposed to the final invoice, are only for form. It is not recorded in the books nor charged to the recipient’s account and could eg be used to provide the buyer with an overview of their order. A standard invoice is used to request payment.
- Format: A proforma invoice, as opposed to a standard invoice, does not list detailed information about the purchase. While invoices include details of the buyer, seller, PO number, location of the purchase, and other posts, proforma invoices only require a small amount of information to outline the total order: total cost and quantity.
- Definition: A proforma invoice provides information to the agent/buyer regarding the particulars of the goods yet to be delivered. An invoice is a commercial instrument delivered to the buyer containing the details of products or services provided by the seller.
- Time of issue: A proforma invoice gets issued before the placement of an order. A standard invoice, on the other hand, gets issued before payment.
When should I use a Proforma invoice?
here are two main reasons why your business may need to create a Proforma invoice:
- Cost estimates: Proforma invoices can act as a 'good faith agreement' between buyer and seller. They can act as a breakdown of the items or services and indicate the total amount due. This means proforma invoices can be a great tool for issuing a cost estimate when, for instance, the sales process is not complete and negotiations are ongoing.
- International shipping: In international shipping, proforma invoices are often used to declare the value of an item to help pass through customs quickly and deliver to your customer on time. This is because proforma invoices will often hold information on shipping costs, packaging, weight, and other shipping details.
What should a Proforma invoice include?
There is no specific structure for proforma invoices. It only needs enough information to outline the total order, specifically the total cost and quantity. Many businesses elect to have the proforma invoice closely resemble their final sales invoice. As such, proforma invoices could include:
- Date of issue
- Contact details for buyer and seller
- Estimated amount due
- Shipping costs
- VAT and other taxes
- Details of goods/ services provided
Can you pay a proforma invoice?
Proforma invoices do not meet the requirements for an official invoice - they are not official documents. Customers are therefore not obligated to pay for goods or services listed on a proforma invoice. A proforma invoice can also not be used in your accounting cycle the way a standard invoice can. Only once a finalized invoice has been issued can the business accept payment from the customer, link the payment to the invoice, and have the payment recorded in its accounting reports. So, payment cannot be made on a proforma invoice.
Proforma Invoicing Template & Examples
There are several proforma invoice templates available online. Another option is to use your invoice template, obtained online or via an accounting software like Xero, re-title it to 'Proforma Invoice', and make amends accordingly.
Here is an example of what a Proforma Invoice template might look like:
Proforma Invoicing FAQs
- Is a proforma invoice legally binding?
While it is more binding than a quotation, a proforma invoice is not legally binding like a completed invoice.
- Is a proforma invoice a tax invoice?
No. While a proforma invoice is a general invoice showing the products or services to be delivered to a buyer, a tax invoice is used specifically within international shipments to denote the foreign sales tax applied to commercial goods.
- Can you claim VAT on a tax invoice?
A tax invoice usually shows the name of the business or person the goods or services are supplied to. This means the invoice would typically not be in the name of your business because the supply was not made to it. In principle, therefore, it should not be possible to recover VAT on invoices in the name of third parties.