How (and when) to use a pro forma invoice
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 and 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.
Top Tip: Before we dive into pro forma invoices, it’s important to understand what a standard invoice template looks like, what information must be included in it and how to make sure you get paid on time to protect your cash flow. To learn more, read our complete guide to how to raise an invoice and get paid 💸.
Table of contents
- What is a pro forma invoice?
- What is the difference between a pro forma invoice and a commercial invoice?
- When to use a pro forma invoice
- Step-by-step: How to create a pro forma invoice
- Wrapping up
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 the business owner of a robot vacuum cleaning company, 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 as a proposed transaction.
This helps you provide your customer with the expected details of the final transaction in a format that can be altered if necessary.
Note: A pro forma invoice is not a legally binding document, and cannot be used for accounting purposes.
The literal definition of 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. This helps both you and your customer gauge projected financial results including net income from this deal in the making so that you can update your cash flow forecast and balance sheets (you can learn more about both of these accounting principles in our guide to accounting for startups).
To be able to send a pro forma invoice, you don’t necessarily have to begin the production of goods.
Commercial invoices, on the other hand, are prepared aftera sale takes place and act as the true invoice.
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.
Note: 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.
Top Tip: Wondering what the difference is between purchase orders and pro forma invoices? These two documents are incredibly similar, yet differ in one meaningful way. A purchase order (PO) is issued by the buyer to the seller and outlines the client’s expectations in terms of the product or service they plan to buy, whereas a pro forma invoice is issued by the seller to the buyer. To learn more about purchase orders and how they work, read our guide to the difference between purchase orders and invoices💡.
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.
Top Tip: No matter what type of invoice you’re preparing, in order to keep things organised and ensure that you get paid on time, you need to have a proper invoicing process in place. This includes setting an invoice schedule, maintaining accurate records, regularly following up with clients and automating your invoicing process. To learn more, read our guide to how to streamline your invoice process ⚡️.
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.
Top Tip: The best way to avoid getting into financial trouble is by hiring an accountant or a bookkeeper that will help you manage your small business finances. An accountant is trained in accounting practices and principles and can act as a consultant to help steer your business in the right direction. And a bookkeeper handles your business’s day to day financial data to free up your valuable time. To learn more about how one or both of these key roles can help you navigate pro forma financial statements, read our guide to the difference between an accountant and a bookkeeper 🙌.
Here’s what a pro forma document 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:
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|
You can also mention any discount offers in this section.
Note: While creating your pro forma invoice, check all relevant laws of the countries involved, including applicable sales taxes, and include them in the invoice.
Top Tip: Because pro forma invoices are not considered commercial invoices or VAT invoices, you cannot use them to reclaim VAT if your business is VAT registered. Therefore, you are not required by law to include VAT information on your pro forma invoice. That said, you do want your pro forma invoice to act as a draft for your final invoice, so including this information from the get-go will make crafting your final invoice easier and more accurate. To learn more about adding VAT onto invoices, read our guide to what information you must include on your VAT 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.
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.
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Photo by Bongkarn Thanyakij, published on Pexels