What is a Pro Forma Invoice?

Pro Forma Invoices

When buyers place an order with a seller, they receive an initial bill that lists the details of their transaction. It can include details like package weight, transport charges and other shipment related information. Buyers need this information to prepare the necessary documents for customs and to calculate custom duties among other things. The document that contains all this information is known as a “Pro Forma Invoice”. The origin of the term is in Latin where it translates to ‘as a matter of form’.

Pro Forma Invoice – Important Points:

  • The exact and correct sale price is usually mentioned in a pro forma invoice.
  • There are no strict guidelines that need to be followed when preparing a pro forma invoice. Only the accuracy of the information contained in it is important.
  • The information that needs to be provided on the form can be limited to the minimum information necessary for Customs authorities to calculate custom charges without a detailed inspection of the goods.
  • Some countries do not accept pro forma invoices for Customs clearance

In today’s world, invoices are a vital part of any business. We know this because we see it in our day to day lives where every transaction, from the smallest one at the local coffee shop to the bigger ones at a furniture store or automobile store – can be recorded in the form of an invoice.

Most people know what a pro forma invoice is, though in day to day transactions most of us rarely ever use a pro forma invoice. In international trade, a pro forma refers to those invoices which have not been completed. In many ways they are an informal document, to the extent that they are not even a part of a company’s accounting. You need an invoice number for every invoice you create but for pro forma invoices, such records aren’t needed.

However, this informal document can be used in some countries for formal submissions, such as when registering the intent to import a shipment or requesting for a letter of credit.

When to Issue a Proforma Invoice?

Invoices are usually generated once the sale agreement has happened resulting in a payment demand. An invoice is a legally binding document so making changes to it isn’t straight forward or easy once it has been issued.

On the other hand, if a deal is in the negotiation stage, a proforma invoice is issued according to what agreements have been made so far. If anything changes, the pro forma can easily be modified as it is not a legally binding document.

There are various reasons why businesses would want to use a pro forma invoice. One common reason is that information such as delivery date, package weight, fees, country of origin and the shipping details may be required in advance by the Custom officials and the pro forma invoice is a great way to provide that information.

Important Note: Even though a pro forma invoice isn’t as strict a document as an invoice, it is not the same as a quote. A quotation is just how much a product may cost if the two parties were to do business together. A pro forma invoice however is an obligatory agreement and shows that the two parties are doing business together. Once everything is in order, the pro forma invoice is converted into an invoice just by a change of title and addition of an invoice ID or number.

Differences between Quotes and Pro forma Invoices?

Let’s first take a look at the similarities.

  • Both documents are not usually legally binding and both offer data and information related to the sale.
  • Their use in the process of invoicing is also roughly the same.

The main difference between a pro forma invoice and a quote is the point in time where the document is needed. A quote is a rough estimate of how much a product will cost if the buyer and seller went into a business agreement together. It gives information that can easily change by the time the deal is done. Neither party is expected to stick to the information provided in the quote and can ignore the document altogether during the later stages of a deal. There is also no information about shipments included in the quote unless this is specifically requested for. Mostly, it just gives the price of a certain quantity of goods.

If required, a pro forma invoice is generated at a time where two parties have already made progress in doing business together and are in the process of arranging to physically move the goods or deliver the service. It provides accurate information on the agreement that will be made, but leaves enough room for changes to be made before a proper invoice is issued.

Format of a Proforma Invoice

There is no internationally recognised standard format that needs to be followed while preparing a pro forma invoice. However, most companies will try to make it look as close to the real invoice as possible. As long as the document is properly labelled and there isn’t any invoice number printed on it, it can be formatted just like the invoice.

Invoices can be generated on word processing tools or purpose built, off the shelf software. Companies that use ERP systems like SAP will have invoices generated as per their required designs.

Since companies make the proforma invoice look as close to the invoice as possible, it is very easy to change the proforma invoice into a proper invoice. Sometimes all it takes is just a click of a button!

Companies must be aware that pro forma invoices are typically generated prior to pick and pack activities in warehouse. This means that some information like lot or batch numbers will only be available on the commercial invoice and never be accurate on a pro forma invoice.

Proforma Invoice – An Example

When two parties have successfully carried out a transaction, it is recorded in a proper commerical invoice. It records the actual or potential transactions that will occur and the costs associated with them.

For instance, a customer may order a bicycle from a toy shop but want it delivered on his/her birthday next week. The toy shop simply prepares a pro forma invoice and sends it to him/her. The customer can use the document for his/her records but he/she doesn’t have to pay anything yet. Once the bicycle is delivered, an invoice is sent. This invoice will list a price either the same as or quite near the price on the pro forma invoice. After receiving the invoice, the customer makes the payment for the bicycle.

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