Looking to streamline the sales process of your business? Consider implementing pro forma invoices. These documents reinforce your contract's terms of sale and can ensure mutual agreement between the buyer and the seller up to the time of delivery.
In this article, we’ll take a deeper look at what proforma invoices include and how you can leverage them for your business.
What is a pro forma invoice?
Technically speaking, a pro forma invoice isn’t an invoice at all – at least not in the technical sense. Instead, a pro forma invoice serves as a preliminary bill of sale.
A pro forma invoice can be sent to a client before services are rendered or goods are delivered. From the Latin for “as a matter of form,” a pro forma invoice is intended to get all parties on the same page regarding the goods and services being rendered, as well as the price the buyer will be expected to pay.
In other words, a pro forma invoice functions as a good-faith estimate of the final costs of goods and services. This form will list the goods and services involved in the transaction, as well as offering a price quotation that will ideally match the finalized invoice.
Therefore, a proforma might contain the following information:
- Quantity and type of goods being sold
- Services rendered
- Cost of goods or services
- Commission fees
- Shipping & handling fees
- Applicable taxes
- Import duties and related expenses
Since the pro forma is not a traditional invoice, it cannot be used for accounting purposes, nor is it a legally binding agreement. In fact, the pro forma isn’t necessarily a guarantee of final costs, as prices may be subject to change.
However, the pro forma protects the buyer from significant price jumps once the transaction is made final.
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Why would you issue a pro forma invoice?
Simply put, this document establishes the terms of a sale. It's sent before the goods are delivered or before the services are rendered and reflects the final agreement accurately.
Although this type of invoice can be sent as a matter of professional courtesy, they serve a series of related purposes, including:
Providing relevant details before delivery
Pro forma invoices are primarily informational. Customers can rely on these documents to take stock of what they are receiving, as well as what they’re spending. Small business owners may especially find this to be valuable, as it helps them to manage their inventory while augmenting their overall sales process.
Determining import duties
These invoices provide relevant details so that customs officials can determine import duties on the shipment. Therefore, this type of invoice ensures a smoother shipping process.
Fast-tracking the purchase approval process
Many businesses have an internal purchasing approval process. A pro forma invoice may not have the same authority as a traditional invoice, but it may have enough detail to fast-track the approval process, ensuring that businesses remain agile.
An example: pro forma invoices and software
Imagine that a company is asked to deliver a software package for a local small business. The software manufacturer may issue a pro forma invoice to the small business owner, who agrees upon the terms of the arrangement.
The final invoice will be as close to the pro forma invoice as possible, at which point the business owner will pay for the software package that they received.
The difference between a pro forma invoice and a standard invoice
Here are the key ways these two types of invoices differ:
Pro forma invoices are sent before shipment
Always send this type of invoice prior to shipping. Conversely, a traditional invoice is sent after the shipment has been received.
Pro forma invoices are not legally binding
Unlike commercial invoices, these invoices not legally binding.
Pro forma invoices are not requests for payment
A regular invoice communicates an expectation for payment. A pro forma invoice does not. It is sent for informational purposes only.
Pro forma invoices are subject to change
A commercial invoice will contain the final price. A pro forma invoice is intended to provide a good-faith estimate of the total value, but unlike a commercial invoice, the final price is subject to change.
Pro forma invoices contain fewer details
A traditional invoice contains a great deal of information, including:
- The names of buyer and seller
- A description of the goods being sold
- A description of services being rendered
- The quantity and/or weight of the goods
- The value of the shipped items
- The location of the purchase
A pro forma invoice, on the other hand, will include a general description of the goods and declare the value of the shipment, which allows customs to determine the duties required.
The benefits of pro forma invoices
For customers, these invoices maximize clarity between buyer and seller, ensuring that the terms of the original agreement will be met. But there are some other, practical reasons, which include:
It can be used as a negotiation tool
Since these invoices include all the relevant sales information, you can use pro forma invoices as a negotiation tool. After all, this is the last opportunity for the buyer and the seller to make any changes prior to the fulfillment of the agreement. Even if these changes favor the customer, allowing changes at this stage may build loyalty in the long term.
It can increase commitment between Buyer and Seller
While this type of invoice is not a legal contract, even as an informal document it can increase a customer’s commitment to the sale. This document may also give your small business an added level of professionalism, which can enhance trust.
It can minimize risk
This type of invoice can also protect buyers and sellers from unnecessary risk. For sellers, it ensures that your customer won’t renege on their original commitment and that you will get paid the original, agreed-upon amount.
Customers are likewise protected from sudden, surprising changes in price or the quantity of goods or services being rendered. While these invoices are subject to change, they provide the most up-to-date estimate of the final sale price.
When to use a pro forma invoice
They can be used with every shipment, but there are several circumstances when it especially makes sense to use this type of invoice.
When you don’t have the details for a commercial invoice
If you don’t have the details necessary to issue a commercial invoice, you can issue a pro forma invoice instead. Keep in mind, though, that you will still have to obtain all the relevant details before the sale is completed for customs purposes.
For example, if you use a pro forma invoice to get through U.S. customs, you will need to provide a completed, commercial invoice within 120 days.
When a bill of sale is required
Occasionally, a customer may require a bill of sale before a purchase may be approved. This type of invoice is a preliminary bill of sale that allows them to obtain approval.
When shipping internationally
Since pro forma invoices contain all the necessary details to clear customs, they are ideal for international shipping.
When selling on consignment
Technically, when selling on consignment, you can only issue a regular invoice for items that have actually been sold. Pro forma invoices can provide a preliminary invoice to the customer, which can then be supplemented with a regular invoice once the items have been sold.
When orders are expected to change
It’s not uncommon for a customer or business owner to change their order. This can be especially true when the goods or services are part of a project whose needs may evolve and change with time. Software companies may especially see their needs evolve as their projects increase in scale.
A pro forma invoice can be adjusted more easily than a regular, commercial invoice. This greater flexibility can help you to meet the evolving needs of your customers. A final commercial invoice can then be submitted upon delivery of the goods or services.
When shipping fragile items
No one wants their shipments to be damaged. Occasionally, a business will have to send or receive fragile components that don’t survive the shipping process. When this happens, a pro forma invoice can quickly be adjusted to reflect the final quantity of goods received, and that new invoice can be converted into a final bill of sale.
Frequently asked questions
It’s understandable that you might still have some questions about the proper use of pro forma invoices. Here are some of the most common questions we hear:
They are sent prior to the actual delivery of goods and services. These documents are for informational purposes only and will only serve as a preliminary bill of sale. The commercial invoice, on the other hand, is sent to the customer after the shipment has been sent.
Essentially, they should reflect the terms of the contract. That means that this document might include the following information:
- Your company name, address, and company logo
- Current date
- The expiration date of the invoice
- A list of products or services and their quantity
- Prices for each item on this list
- Tax information
- Commission fees
- Import duties and/or shipping costs
- The total amount the buyer will need to pay
- Your payment information
Again, some of this information may be subject to change, but this establishes a baseline of what both parties can expect from the result of this transaction.
There are no official guidelines. Business owners are therefore free to construct their own template, if they wish, provided it can accommodate the information required.
Don’t forget that Invoice2go, a Bill.com company offers online tools to create a template that can be used to send invoices quickly and easily.
Standard invoices contain an invoice number that is recorded for accounting purposes. Pro forma invoices, however, do not have an invoice number. They cannot be used for accounting purposes.
Customers can use the information on this type of invoice to pay in advance for goods and services. However, two things should be considered.
First, the customer should maintain careful documentation so that they don’t accidentally make multiple payments. Second, since these invoices are subject to change, customers should be prepared for adjustments in the price and quantity of the products they receive.
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