What is Proforma Invoice, a Beginner's Guide

What is a Proforma Invoice? A Beginner’s Guide

Have you heard about a proforma invoice? It’s a type of invoice that’s pretty common, yet not a lot of people know about it. You might be doing it right now without knowing that it’s a form of proforma invoice. We want you to be as aware and as knowledgeable about your business as we can. That’s why in this article, we’re going to introduce you to the proforma invoice and everything you need to know about it.

Proforma Invoice Definition

According to Investopedia, a proforma invoice (or pro forma invoice) is a preliminary bill of sale sent to the customer in advance of a project, shipment, or delivery of items. This invoice will describe the purchased items as well as other essential details and information. These details include items needed to be purchased, shipping weight, transport charges, and more. So, it’s an invoice that bills the customer for the charges made before the actual service rendered or product sent.

The word “Pro forma” is Latin for “as a matter of form” or “for the sake of form.” This type of invoice comes into play during international business transactions, most notably for customs on imports.

How Does a Proforma Invoice Work?

As you very well know by now, a proforma invoice is different from a standard invoice. It’s a binding agreement – although the terms of sale are subject to change. Businesses in all industries use the proforma invoice to compensate for their internal purchase process. It streamlines the sales process by eliminating additional follow-ups and other issues after a sale goes through since all terms have been agreed to upfront.

A proforma invoice provides the buyer with the exact sales price. It also includes an estimate for any commissions or fees, such as shipping costs or any applicable taxes. While the proforma invoice may be subject to change, it offers an excellent estimate to avoid exposing the customer to unexpected charges once the transaction is closed.

Before shipping any agreed-upon deliverables or the actual items, you may need to send a proforma invoice to make sure the customer knows what he’ll receive from your company. While it contains the exact cost, details associated with the sale, it’s considered not an official depend for payment. No guidelines will dictate the exact presentation or format of this type of invoice. In addition, it may or may not resemble other types of invoices.

Considerations

A proforma invoice has special considerations depending on the country or region. Here in the U.S, specific documentation is required before goods are allowed to pass through customs. Traditional commercial invoices provide important information, such as the following:

  • A description of the goods.
  • Names of the buyer and the seller.
  • Quantity of goods or services.
  • Value for all the shipped items.
  • Location of the purchase.

This invoice provides enough information to allow your customers to determine the things needed to form a general examination of the included goods or services. If you use this invoice when sending items internationally, you also need to present a commercial invoice within the next 120 days.

Example of Proforma Invoice

To put things into perspective, let’s have an example. If the parties have completed a sale, a commercial invoice will record everything. If the transaction has not yet occurred, the selling firm will use a proforma invoice. The same firm can also use a proforma invoice if the sales contract specifies that full payment is not due until the buyer receives certain goods indicated in the agreement terms.

For instance, a customer of a bakery store might agree to a price for a cake on the proforma invoice that was sent to him, with the baker delivering the cake once it’s ready. The customer will then pay for everything when they receive the invoice. The final invoice amount will also be the same or close to the total amount that’s indicated on the proforma invoice.

Why Use Proforma Invoice

Now that you know how to use this invoice, the next thing you need to know is why to use this type of invoice. This type of invoice streamlines the sales process. Your customers will agree to the price on the pro forma invoice before you deliver the goods. That way, you can guarantee that they are aware of the amount and they agree to pay it. There’s no back and forth after you’ve fulfilled your end of the bargain since it’s already agreed on upfront.

There are several advantages to using a proforma invoice. Here are some of them:

  • A pro forma invoice is ideal if you don’t have all the details for a commercial invoice (e.g., before the goods are delivered).
  • Pro forma invoices are usually sent to declare the value of goods for customs to ensure a smooth and hassle-free delivery process.
  • This type of invoice isn’t a payment demand or request. Instead, it acts as a ‘good faith’ agreement so that your customers are aware of what they are receiving and how much they’re going to pay for it.
  • Some business also requests a proforma invoice for their internal purchasing process for documentation and recording.

Difference Between a Standard Invoice & Proforma Invoice

A standard invoice or commercial invoice is an instrument that states the total amount due. On the other hand, a proforma invoice acts more like a declaration by the seller to provide goods and services on a specified date and time. An invoice and a proforma invoice have the same format. However, the former is sent after the goods and services have been delivered. The latter is sent prior to delivery.

The purpose of a pro forma invoice is to inform clients about what they are getting and how much they are paying for it before it’s actual delivery date. An invoice is a type of document that lists down all the goods and services that have been delivered.

As you can see, there are striking differences between the two. Each offers unique advantages to the seller, which is why using them simultaneously is a great business practice. It also ensures that both parties are on the same page and that issues and disputes will be minimal.

Wrapping Up

So, there you have it. A proforma invoice is necessary for any type of business as it gives clients a ‘heads up’ on all of the items they will receive. At the same time, they are also informed about the amount due. That way, they already know how much they will be paying even before the goods or services are delivered.

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