WHAT IS A PROFORMA INVOICE? ALL YOU NEED TO KNOW FOR YOUR BUSINESS

A proforma invoice is a key element in your whole business finance and invoice system. Ultimately, it is essential to have one, so you can get paid by your buyers. As a business owner, you are not likely to get very excited about creating and sending invoices, but you’ve got to keep the cash flowing and that’s why you need to understand what a proforma invoice is; how it fits with all the other different types of invoice; what it contains, and how and when to use one. Receiving payments from your customers is of crucial importance for your business’ survival, so anything that helps you make this process easier and less daunting can only be a plus.

What is a proforma invoice?

Starting with the basics, let’s see what a proforma invoice actually is. Simply put, a proforma invoice is not a real invoice, but a preliminary estimate of what the cost of the goods and services will be. In this sense, it’s closer to a quote or a ‘good faith’ agreement between you and the buyer. For those already familiar with the term, it’s a provisional bill of sale and it’s always for goods or services not yet rendered. This means that the terms in a proforma invoice can be subject to change.

Reasons for issuing a proforma invoice

There are a variety of reasons why a business would want or need to issue a proforma invoice, prior to sending a final one. 

A proforma invoice:

• Gives your buyers/clients detailed information about what products/services they’ll receive, at what price and by when; 
• Serves as a proof of your obligation as a supplier to ship the goods or provide the services at an agreed price;
• Helps the customer to decide whether they want to go ahead with the purchase;
• Serves as a declaration of the value of the goods for customs in order to make the delivery process smoother; 
• Helps your customer to internally finalize the purchase order process as it will serve as proof of your obligation to deliver for the internal procurement and buying teams;  
• Can be changed if prices or delivery dates are not suitable for the customer or delivery dates need to be moved forward, due to a change of circumstances for the organization buying your goods or services (such as new deadlines, the need for urgent delivery, or a change in the mode of shipping).

When should I send a proforma invoice?

As a rule of thumb, a proforma invoice should always be sent prior to delivering the goods or providing the services that you’ve agreed on with your customer. And here’s the key point: ‘agreed on’. It’s important to remember that a proforma is usually sent only after you have a commitment from your customer that he/she intends to buy from you. In this case, you wouldn’t be sending an official (sales) invoice because the terms might not have been finalized, or the buying process in the customer’s organization requires that final invoices are only sent upon receipt of goods or services. In cases such as these, a proforma invoice gives you the flexibility to continue negotiating the finer details, while still keeping the level of commitment high, so you don’t lose the deal.

How is a proforma invoice different to a standard invoice or a quote?

A proforma invoice is very similar to a standard (aka “sales”) invoice as both of them provide information about costs (per unit, volume, etc.), the number of items or the specific services, and the final cost. If you are supplying goods, the shipping cost is included in both types of invoice. 

However, a proforma and a regular invoice are not one and the same. The main difference is that the proforma does not constitute a binding agreement and does not have any legal implications, unlike a standard invoice. The sales invoice is considered a tax document and is also known as a “tax invoice”, if it includes VAT.

Other differences between the two types of invoices are that a proforma invoice is always sent before the goods or services are delivered and it is negotiable, so is subject to change. For this reason, it’s only valid for a limited period of time, unlike the regular one, which cannot be changed, and is valid until its terms have been satisfied. 

Proforma invoices are also very similar to quotes (or quotations) and can sometimes be used in their place. In fact, a proforma is a quote produced in the form of an invoice. Just like a quote, a proforma invoice is not used for payment. Nevertheless, there are differences, mainly due to the fact that proforma invoices are more detailed and formal than quotations. 

If you are still not sure how to manage your invoicing you can find many helpful resources to make the process less cumbersome. 

Benefits of using a proforma invoice

Not every business should or needs to use a proforma invoice. However, there are certain benefits in doing so. 

• A proforma invoice provides important details before delivery of goods or receipt of services

Although many of the details on a proforma invoice will also be included in the final invoice, it’s useful for your customers to familiarize themselves with them prior to ordering, so as to avoid unwelcome surprises afterwards. This includes a detailed breakdown of goods, services, volumes, prices and sales, payment and delivery terms, including expected delivery dates. 

• It is a great negotiating tool 

Proforma invoices are not a final, binding document, so they can be changed both by the buyer and the seller. As a seller, this is a way for you to build loyalty by establishing good working relationships with your customers and leaves both parties feeling in control of the situation by providing clarity and transparency in the negotiation process.

• It helps both buyer and seller to commit and agree

A proforma is non-binding, but it’s still a way to seek and give informal commitment from both parties. As it’s a type of quote, it can help the order to be approved by your buyer, especially if you are dealing with large organizations that might have slow and cumbersome internal purchasing processes. 

• Provides flexibility

If something unplanned happens, such as a change of delivery date, or shipping location, or the buyer changes their requirements, a proforma invoice gives you the right level of flexibility to change your terms as well.

Project scope and business needs change frequently, so if you have quoted that you will deliver a specific service (e.g. construction work or copywriting), you might consequently discover that you need additional materials or that you need to invest more time in research, in order to deliver the right result to your customer. By using a proforma invoice, you can stay on top of your work with the added flexibility of reflecting the necessary changes in scope in the final invoice, without complicating the accounting process.

What should be included in a proforma invoice?

A proforma invoice usually looks very similar to a sales or regular invoice. However, it doesn’t need to contain an invoice number, which is mandatory for standard invoices. Everything else is the same or similar. Here are some of the fields to include in a proforma invoice: 

• Issue date (and also a due date);
• Seller details, such as name, address, company name; 
• Customer details, such as name, address, company name; 
• Service or product name and description of the goods or services (if it’s a product then you need to provide article number, model, etc.);
• Number of units, or any other measurements (e.g. billable hours, weights); 
• Price per unit;
• The total cost of the services or goods;
• Applicable taxes (incl. VAT) may or may not be included; 
• Any applicable Terms of Delivery or sales, relevant Terms of Service or a link to them;
• Payment terms – even if the customer is not expected to pay after receiving the proforma invoice, it’s worth mentioning your payment terms at this stage to set expectations and to avoid misunderstanding at later stages;
• Clearly stating that this is a PROFORMA invoice to avoid misunderstanding;
• Clearly stating that this IS NOT a tax invoice;
• A signature (and, in some countries, a stamp) by the legal representative of your business or organization.

Since a proforma invoice is not a commercial invoice and doesn’t contain all the information required by customs, in some countries, you might be required to also produce a commercial invoice in order to assist with the inspection of goods and calculation of the duties and import taxes. This will depend on the specific country to which the goods are shipped.

Main takeaway

Proforma invoices are not mandatory, but it’s good to know what their advantages are and how you can use them as a negotiating tool or simply as a way to build trust with your customers or run a smoother operation.  They can also save you a lot of time as a business, especially if you are a freelancer or a sole proprietor, so you can invest in doing what you love to do, rather than being burdened by unnecessary tasks.