How (and when) to use a pro forma invoice

Proforma invoicing header image by bongkarn thanyakij, from Pexels

Nearly all kinds of businesses deal with invoices.

An invoice is a formal document sent by a seller to a buyer that lists all the details of the sales transaction and the goods or services involved.

But there are some situations where a seller might want to send an invoice as a projection of costs involved in the upcoming sales agreement. 

This is where a pro forma invoice comes in. Pro forma invoices are a representation of future transactions, therefore do not represent an official fiscal receipt. 

In this article, we’ll help you understand what a pro forma invoice is, when to use it, and how to create one for your own business.

Table of contents

What is a pro forma invoice?

A pro forma invoice is a preliminary sales document issued by a seller to a buyer before the goods or services are produced or delivered.

For example, consider that you’re a supplier of robot vacuum cleaners, and you receive an order from Spain for a shipment of 100,000 units.

Even before you’ve started procuring raw material or hiring the required workforce, you can send a pro forma invoice to your international client.

This helps you provide your customer with the expected details of the final transaction in a format that can be altered if necessary.

Quick Tip: A pro forma invoice is not a legally binding document, and cannot be used for accounting purposes.

The literal meaning of the word ‘pro forma’ is “as a matter of form.” This means that even though a pro forma invoice has no fiscal value, it still exists for the sake of formality.

Here are some advantages of a pro forma invoice:

  • It helps the customer know what to expect from the purchase.
  • It’s a negotiating tool between you and your customer.
  • It works as a declaration of the value of goods for customs purposes, ensuring a smooth delivery process.
  • It’s a good replacement for a commercial invoice if you don’t have the complete details of the sale.

What is the difference between a pro forma invoice and a commercial invoice?

Pro forma invoices work like a price quotation but are prepared in an invoice form. It differs from a quotation because while it is not an official invoice, it is still a binding agreement even though the terms and conditions may change. Quotations have no legal justification. 

Pro forma invoices are used to create a sale and are shared with prospective customers who have either placed an order or requested a formal type of quotation.

To be able to send a pro forma invoice, you don’t necessarily have to begin the production of goods.

Commercial invoices are prepared after a sale takes place.

It is the final bill sent by a seller to a buyer, mentioning that they have completed the production and delivery of the order.

Commercial invoices are mostly used in import and export situations. Governments may also use them to determine the true value of goods and to assess whether customs duties have been paid or not.

Quick Tip: The content of a pro forma invoice and a commercial invoice is almost identical to each other, but the usage of each invoice is different.

When to use a pro forma invoice

A pro forma invoice is more of a “good faith agreement” than a payment demand. It helps both the seller and the buyer get on the same page about costs from the get-go.

These invoices are used to provide a general picture of the final invoice and can be adjusted at a later stage in case there’s a change in cost during the manufacturing process.

For instance, a supplier may end up asking for more money if there is an unexpected increase in labour or procurement costs.

Pro forma invoices are most commonly used for international transactions. 

In fact, a pro forma invoice may be required by some countries as part of their import licensing procedures, since it includes buyer information, weight and size of consignment, delivery fees, and other details.

Some countries also use commercial invoices to control imports. Make sure you always prepare invoices according to the client’s country policies.

Pro forma invoices can also be used to open letters of credit for importers. Plus, these invoices look similar to a commercial invoice, which most traders are already familiar with.

Once you’ve held your side of the bargain and prepared the final order for your client, you can convert your pro forma invoice into a final invoice, and then issue it for payment purposes. 

Step-by-step: How to create a pro forma invoice

There is no single way of creating or designing a pro forma invoice. In fact, creating a pro forma invoice is quite similar to creating a commercial invoice.

However, there are some specifics or best practices you should follow to avoid getting into legal trouble with any country.

Here’s what a pro forma invoice should ideally include:

  • The term “pro forma”
  • Invoice date
  • Seller information
  • Buyer information
  • Shipment information
  • Descriptions of goods to be sold
  • Terms and conditions

Follow this step-by-step guide to create a pro forma invoice for your own business.

To outline this step-by-step process in detail, we’ll use a fictional example of a textile company called “Luxury Fabrics” (seller) and a furniture company called “Falcon Furniture” (buyer).

Step 1: Fill out the basics

The first step is to jot down all the essential information related to both the seller, buyer and shipment.

Seller information should ideally include your company name, logo and contact information, such as your mailing address, phone number, email address, website, and country of origin.

Since most invoices are created on the official company letterhead, the seller information may already be entered. Still, make sure everything is up-to-date.

Buyer information also includes their company name, contact number, email address, mailing address, city, country, and other details.

Additionally, make sure you add the words “pro forma Invoice” at the top of your document.

You could also include some important dates in your invoices, including invoice request date, invoice creation date, and invoice expiration date.

You don’t necessarily need to include an invoice number in your pro forma invoice, as it cannot be used for official accounting purposes.

Another essential item to include in your invoice is shipment information.

This includes the number of items you’re sending, total weight, and the mode of transportation you’re using to ship the items (by air, by rail, or by water).

Here’s what the upper section of your invoice should look like:

Template of a pro forma invoice

Step 2: List all product and pricing details

The next step is to list down all the information related to the goods you’re selling.

This part is the crux of your pro forma invoice. Here, you’ll include the details for each and every item you’re shipping, including name, quantity, unit price and the grand total.

This information should ideally be listed in the form of a table, so it can easily be read by all parties involved in the transaction.

It’s good practice to list each item separately, as well as mention a brief description next to the item name or ID.

Lastly, make sure your due total is mentioned in a clear and bold font so your customer knows what to expect from the purchase.

Going back to our example, consider that Luxury Fabrics has received an order of sofa cloth from Falcon Furniture.

Here’s what the product and pricing section of their pro forma invoice would look like:

Sr. # Product ID Product description Quantity Unit price(£) Total(£)
1 WF-2550 Suede sofa fabric, gray colour, full roll 250 167.99 41,997.5
2 WC-1020 Knitted sofa fabric, black colour, full roll 150 207.50 31,125
3 WK-1250 100% polyester sofa fabric, beige colour, full roll 300 125.00 37,500
110,622.5

You can also mention any discount offers in this section. 

Quick Tip: While creating your pro forma invoice, check all relevant laws of the countries involved, including applicable sales taxes, and include them in the invoice. 

Step 3: State your financial and shipping conditions

Your pro forma invoice should also include any terms and conditions, along with the reason for sending goods to another country.

This information usually goes at the end of your pro forma invoice.

In case you’re in the middle of a temporary trade, where your exported items will be returning back to the country, mention “temporarily exported” on them to avoid any hassle in the shipment process.

Also if your items are subject to specific terms and conditions, you can mention these here as well.

Step 4: Sign and stamp your pro forma invoice

The last step of creating your pro forma invoice is to sign and stamp it.

Make sure you include your full name and signature, along with your official company stamp.

Wrapping up

If your company is involved in international buying or selling, it’s important to be aware of pro forma invoices and if they are applicable to your business.

Knowing the difference can help you develop better relationships with the businesses you deal with, avoid any issues with country-specific import or export laws, and ensure a smooth delivery process.

Ready to start doing what you love? Register your limited company with Tide for FREE. It’s fast, easy and best of all, it’s free – we pay the £12 incorporation fee on your behalf. So what are you waiting for? Start your company registration process with Tide today!

Photo by Bongkarn Thanyakij, published on Pexels

Shahree Zin

Partnerships Executive and small business accounting advocate

Tide Team

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