Proforma Invoice – Invoicing Basics Made Clear

Do you directly deliver the goods or offer services to your customer without providing an approximate price, beforehand?

Every customer prefers to get at least a rough idea of how much they are expected to pay for the products or services they demand. This is where the proforma invoice comes into the picture.

Though it is termed as invoice, a Proforma invoice does not demand or request any payment. If you are acquainted with the transaction process, you might be aware of estimates or quotes. Well, the proforma invoice is almost the same. There is no legal difference between proforma and an estimate.

Let’s understand in detail:

What is a proforma invoice?

Technically, a proforma invoice is an estimated invoice that does not request payment from the customer before supplying the goods or services. It carries required information and is not considered for accounting processes. Though the information in a proforma invoice and a commercial invoice is more or less similar, it does not have the same legal importance.

Proforma is a document that reflects the seller’s intention to deliver goods or services to the customer at a particular price. Proforma invoice meaning is actually a ‘good faith’ agreement that allows the customer to know how much the seller is expected to charge.

A proforma includes products/services cost along with other crucial details like shipping charges, transport charges, delivery information, etc. Since it is just an estimate and not the final price, a proforma invoice is subject to change and cannot be treated as a true invoice.

Is it pro forma or proforma?

Whether it is a pro forma invoice or a proforma invoice, both the terms mean the same. Sometimes this preliminary bill of sale is listed as a pro forma invoice and sometimes it is listed as a proforma invoice, eventually, the meaning is the same.

What is the purpose of the proforma invoice?

When a customer visits any store, they don’t buy the product directly. They first ask for the price. Every buyer has the right to know the value of what they are purchasing. The purpose of the Proforma invoice is the same. It declares the value of the goods/services to the customer. When they agree to the price, then you deliver.

The mere purpose of a proforma invoice is to streamline the sales process. Sometimes the client may ask for this invoice for their internal approval process. It is a common invoice used in trade transactions.

When to use a proforma invoice?

A proforma invoice gives a clear idea to your clients about every detail regarding the delivery of a product and its cost. Therefore it quotes an estimated amount before proceeding with the transaction.

For example, a catering company gets an assignment to deliver a three-course meal for 20 people. Then the owner needs to calculate the overall cost, add his markup and present the estimate by creating a proforma invoice to let the client know about the cost.

Before moving on to the process of creating a proforma invoice let’s understand its advantages!

Benefits of a proforma invoice

If you feel sending a proforma invoice is utterly unnecessary, then do check out the following points.

  • A proforma invoice is used to provide vital information to the customer before service delivery, like the expected delivery date, itemized breakdown of the price, due date, etc.
  • This is a form of informal level of communication between the seller and the customer that helps the sales to get approval before final invoice payment.
  • Proforma invoice ensures the scope of changes both from either side of the business transaction. It plays an important role as a great negotiating tool as it contains all the relevant sales information.

How to create a proforma invoice?

A Proforma invoice may not have all the details or resemble a commercial invoice but you need to make sure the invoice is created correctly addressing all the necessary information that a customer needs to know. In some parts of the world, it also serves as legal binding so it should be valid.

Ideally, you want the proforma invoice to be as close as to the actual invoice so that eventually you can easily turn it into a commercial invoice (if the customer agrees to the proforma invoice).

What information is required on a proforma invoice?

A proforma invoice should include the following information:

  • Customer key details – name, address, contact information
  • Business key details – name, address, contact information
  • Breakdown of cost (based on time and materials)
  • Individual prices of each item/element
  • Applicable discounts and shipping charges
  • Detail of start time, how long the work will take and end date
  • Payment terms & conditions (mode of payment, payment term, etc.)
  • Due/expiry date of the quote
  • Total price
  • Other miscellaneous details required

*Since it is not the final bill, taxes may not be included.

How to handle a proforma invoice?

By now you know, what is a proforma invoice? Let’s now discuss the best practices of handling proforma invoices to ease up your transaction procedure.

  • If your proforma invoice is subjected to any change in amount, then make sure the amount should be close to the actual amount.
  • For export sales, the proforma invoice should have all the required details so that it can be converted into a commercial invoice instantly.
  • Make a note of the proforma invoice, as some factors may fluctuate, like market cost, international fees, and currency rate, with the rise and fall in the market.

What is the difference between a commercial invoice and a proforma invoice?

A commercial invoice is basically a request of payment for the confirmed sale that took place between buyer and seller. A Pro forma invoice, on the other hand, is the estimated price or declaration of what amount is expected from the customer. The goods or services are yet to be delivered.

A commercial invoice is issued to the client before the payment is made or during the purchasing period while a pro forma invoice is issued before the order is placed.

As far as formatting is concerned, a commercial invoice should include all necessary information like customer details, business details, billing address, terms, and conditions. A proforma invoice along with all standard invoice details must be clearly labeled as a proforma invoice.

No matter what, a commercial invoice is necessary to get the bill paid as it serves as a legal document. It is also considered as accounts receivable or accounts payable and is used for reference in case of an audit. A proforma invoice just gives an idea to the customer of how much needs to be paid and when to pay. It does not demand payment so it cannot be used for accounting purposes.

Can you receive payment on a proforma invoice?

As we mentioned before, the proforma invoice is just a declaration of what is the expected value against the products and services you will be offering, so it cannot be treated as a final invoice.

Technically, a pro forma invoice contains all the details as a commercial invoice. Payment can be received on the basis of that. But since they are not used in accounting, payment shouldn’t be received using the proforma invoice. Even if the client agrees to the cost mentioned in proforma, they prefer to get the final invoice for making the payment.

Comparing proforma invoice with other purchase forms

It is clear till now that the proforma invoice is different from a regular/commercial invoice. Here is also a comparison of this invoice with other forms like a bill of sale and sales receipt.

Proforma invoice vs bill of sale

A Bill of sale is a formal document used to sell or transfer ownership while a proforma invoice has nothing to do with ownership.

A bill of sale serves as a record or proof of a particular sale to a customer. The Proforma invoice does not prove any sale of goods or services.

To be more precise, a proforma invoice is a preliminary bill of sale.

An invoice and a bill may sound synonymous and interchangeable but they differ from each other on certain points. Check out our article on the difference between an invoice and a bill to know more.

Proforma invoice vs sales receipt

A proforma invoice shows what could be purchased while a sales receipt is a document that shows what has already been purchased.

Proforma is basically a pre-invoice that is created before a sales receipt. Sales receipt, on the other hand, is the proof of purchase made and payment done.

Is it necessary to send the proforma invoice?

Yes, why not! You should send a proforma invoice to your client as it gives them a brief idea about the goods and services you will be offering, precise price, and terms of payment. It acts as a negotiation mode where no payment is made but only quoted. This builds a trust factor among the customers.

Proforma invoice is not compulsory however it can help to streamline the transaction process. It is usually used by sellers for new customers where a business relationship is yet to be established. A simple estimate of the products or services you offer can help to build customer loyalty and grow business.

Terms of a proforma invoice

When the seller has to still pay for the goods and when the commercial invoice is not ready, a proforma invoice is served. The buyer may not necessarily buy the products or agree on the cost offered in the proforma invoice. Hence, it is very important that the terms you describe in the invoice are compelling enough and also clearly stated so that the customer finally clinches the deal.

Key takeaways

Now that you know how pro forma invoice works, it must be clear how helpful the invoice is to build customers’ trust and grow business. As it is one of the primary interactions with the client, especially, it is sent before the work is done, professional support can help you get ahead of the game.

FAQs related to proforma invoice

Is GST applicable on a proforma invoice?

GST is not applicable for the proforma invoices as these are not meant for transactions to take place. Hence, these are not taxable.

Is signature necessary on a proforma invoice?

Yes, once the proforma invoice is accepted by the buyer, it should be signed to show the acceptance.

Is a proforma invoice the same as a tax invoice?

A tax invoice is used to inform the buyer about the payment due for a particular purchase. Whereas, a proforma invoice outlines the product or service list along with prices and other sales term details. Therefore, both are different from each other.

Get your free proforma invoice template with Billbooks. Download, customize it, including the cost, and send it to your client. This will make your transaction process more smooth. Creating a proforma invoice is now just a matter of a few minutes.

The proforma invoice looks so professional and flawless that it can be easily converted to a commercial invoice if the customer agrees to the quote. You don’t have to do it from scratch.

Divya Mudliar
Divya Mudliar
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