Pro Forma Invoice Explained: Why, When and How to Use It

For those of you whose strengths do not lie in numbers, talking about invoices and pro forma invoices could, at the very least, be confusing.

However, as a business owner, it’s important to know the meaning of these terms so that you can run your business more effectively. 

So, what does a pro forma invoice mean? Here’s all you should know.

What Is a Pro Forma Invoice?

In more formal terms, sellers present this type of statement to the client as a courtesy before they enter a final purchase or transaction. 

A pro forma invoice will ultimately list the number of goods, a description of the items, their prices, and VAT, where necessary, as well as any other details to make the initial process of the buyer’s interest in your products a bit more formal.

And here, we’d like to emphasise the word “initial” because a proforma invoice is a preliminary bill of costs that is sent to a client before a merchant supplies any products or performs a service. 

However, it’s not provided with the intention of requesting payment. On the contrary, a payment request is made when sending the official invoice. 

Let’s start with an example to clarify things and put them in perspective. Say that you own a business in the UK and you’ve got a client in Spain who’d like to order 50 leather sofas from you.

Before you ship your goods and before they make the last payment, your client will want something like a quote from you to know and expect how much they’d have to pay you. This is known as a pro forma invoice.

Why Do Businesses Use Pro Forma Invoices?

Before you create a pro forma invoice for the first time, it’s vital that you fully understand why companies use this document in the first place before providing the final sales invoice. 

In most cases, this preliminary invoice is sent to inform a buyer of what the supplier is responsible for. The pro forma sets the scene for negotiation and demonstrates the business’ interest in providing goods or services at a certain price and at a certain time. 

The pro forma invoice also registers the customer’s acknowledgement of the product or service and their willingness to pay to obtain it. Moreover, it initiates the quote-to-cash process and serves as an asset that can cut down processing times and expenses.

Among the main reasons why businesses rely on pro formas is because they help: 

• Set clear terms with customers and prevent misunderstandings.
• Streamline the sales process.
• Stabilise international shipping transactions.
• Ensure everyone is on the same page and has agreed to the same terms before the final invoice is sent to the customer.
• Provide a formal record for customers and the business.
• Inspire commitment from the customer.

As a result of all of these reasons, pro formas are considered a part of business processes today. 

When Should a Pro Forma Invoice Be Used?

Pro forma invoices are commonly used in imports and trade transactions prior to the formal invoice. 

Here are the scenarios in which pro forma invoices can be used:

• To declare the value of goods for customs.
• When you don’t have all the details required for a commercial invoice.
• Some clients use it for their internal purchase approval process.
• When items may be damaged in transit.
• When customers may change their order.
• When project scope may increase.

It’s crucial to understand that pro forma invoices are sent to customers once they’ve agreed to purchase goods or services from you. However, they can’t be treated as final invoices as the final details still need to be agreed upon. 

To create and send a pro forma invoice, you can use pro forma invoice templates available online. You can also rely on invoicing software with pro forma features. 

How to Create a Pro Forma Invoice

To be able to create pro forma invoices, it’s key to understand the structure of this document. The best way to do this is to look at an example or a sample pro forma invoice.

If you are wondering what should be included on a pro forma invoice, here is a list of the typical elements featured:  

• The words “pro forma” and also “this is not a tax invoice”;
• The seller’s company name and contact details, logo, and billing address;
• The current date and the expiration date for the pro forma invoice – this can be in 30, 60, 90 days’ time or more;
• A description and list of the products and/or services that are being sold;
• The quantities of each item;
• Individual and total prices for each item being ordered;
• Possibly the inclusion of tax rates, such as VAT and the amount;
• The total amount the buyer will be required to pay;
• Specifics about your payment terms details.

You can create pro forma invoices for your customers by including all of the above-mentioned sections. Make sure that you provide accurate information under each component and be as detailed as possible during the process.

Advantages of a Pro Forma Invoice

So, what are the perks of using a pro forma invoice?

Other than showing your professionalism in doing business, a pro forma invoice offers the following advantages: 

• Ensures a smoother sales process.
• Provides the customer with all the required information.
• Details can be changed/negotiated.
• Does not hold the status of a legal agreement.
• Can be helpful in checking for errors.
• Can stand in the place of an invoice if all the details aren’t available yet.
• Can help with internal purchase processes.

Overall, the key benefit of the pro forma invoice is that it improves the preliminary understanding and commitment of both the buyer and the seller.

What’s the Difference Between a Pro Forma Invoice and an Invoice?

But what’s the difference between a pro forma and a final invoice?

First, a pro forma invoice doesn’t have an invoice number like an invoice does. Second, it is not legally binding like an official invoice is. This means it can be cancelled without an obligation by the buyer to make a payment. 

In addition, merchants do not use a pro forma invoice for accounting purposes like an invoice is and therefore, do not record it as such. 

What’s more is that with a pro forma invoice, you can always change and amend the details prior to delivery of the goods or services and this does not limit you to sticking to a specific amount which could change later. 

At the same time, a pro forma invoice and a standard invoice are part of a whole. The pro forma is sent prior to the sales invoice and notifies about the deliverables from the seller, covering details like the products or services that are to be provided, their prices, shipping information and shipping costs, delivery date, and more. 

Once the pro forma invoice has been reviewed and agreed upon, the seller sends the sales invoice and starts executing the deliverables of the deal. 

Is a Pro Forma Invoice Legally Binding?

As mentioned above, a pro forma payment is not legally binding as it is not considered a part of the official legal documents, whereas an invoice is. 

An invoice is a requisite for accounting, whereas a pro forma invoice is not. Pro formas can easily be compared to an estimate rather than a legal invoice. This is partially due to the fact that buyers aren’t obliged to pay the amount presented on the pro forma and that the amount due is not listed under the shopper’s accounts payable or accounts receivable. 

In addition, unlike a regular invoice (or a VAT invoice for those registered for VAT), the pro forma doesn’t need to include VAT information and, therefore, cannot be used to reclaim VAT.

Conclusion

Now that you know more about what a pro forma invoice is, it’s not as scary as it may have first appeared!

Ultimately, this piece of paper or electronic item offers the buyer detailed information about their intended purchase without binding them to make a payment. It also doesn’t bind the seller, who does the invoicing.

Disclaimer: Please be aware that the contents of this article and the myPOS Blog in general should not be interpreted as a legal, monetary, tax or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.