What is a Proforma Invoice? Meaning, Uses, Format, Examples

A proforma invoice is not a comprehensive record of a transaction like a formal invoice but an estimate. As a buyer, you should wait for a bill of sale and/or a final invoice before making payments. That said, some businesses may make a partial payment in advance as a professional courtesy. Once negotiations have finished, and all parties are in agreement, you can send a preliminary invoice as a good faith estimate, letting your customer know exactly what to expect ahead of time. Your customer will then give final approval to the price and any other terms of service.

The invoice should be signed by hand and, if necessary, stamped with a company stamp.

  1. When a deal is verbally or mutually confirmed, XYZ company can send a proforma invoice to the customer who inquired about a particular item.
  2. Once the purchase order is accepted, then a legally binding contract exists between the buyer and the seller.
  3. Proforma Invoice allows the customer’s accounts payable department to prepay the actual receipt.
  4. Read about free tools, how to accept credit card payments, and getting ready to launch.

The amount due is not recorded under the client’s accounts payable or under your accounts receivable. This part of the process doesn’t happen until you submit a final invoice after the work is complete. Pro forma is Latin for “for the sake of form.” You can think of a pro forma invoice the value of grant writing software as a preliminary invoice. There are two main reasons why businesses may send a proforma invoice before a sale is completed. The purpose of a proforma invoice is to show how much goods or services will cost to help the customer decide if they want to go ahead with the purchase.

Further, without official documentation, you’ll fall victim to invoice fraud. FreshBooks has created easy-to-use Estimate and Proposal software tools that seamlessly create proforma invoices for any industry scenario. Most business owners and managers understand how challenging it is to balance invoices, estimates, proposals, and more. While the benefits https://simple-accounting.org/ of using proforma invoices are undeniable, it might seem overwhelming to manage the delivery and filing of yet another type of document. Including a proforma invoice with your shipment makes international trade and imports as hassle-free as possible. It’ll also speed up the approval process and make sure you deliver to your customer on time.

Proforma invoices and commercial invoices are both export documents commonly found in international trade. In the accounts payable process, a proforma invoice is used to create a sale, while an official invoice confirms the sale. Understanding the differences between invoices will help you create an efficient accounts payable workflow and avoid costly mistakes, like paying an invoice twice or violating regulations. A proforma invoice gives your customer the opportunity to negotiate the terms of sale, which ultimately supports a strong, long-term business relationship. Companies looking for ways to grow rapidly and improve their billing process should consider using Proforma Invoices.

When to use a proforma invoice

Proforma invoices must also clearly include a “Proforma” label, so as not to get confused with other sales documents. While pro forma invoices tend to follow the same general template, there are no standardized or legally regulated guidelines that dictate exactly how a pro forma invoice should be formatted, presented, or written. If your manufacturing company receives a large order, sending a proforma is a good idea. By including information on the product, quantity, cost, delivery date, and any other details of the sale, you’ll ensure your client is aware of all terms of service.

Proforma Invoice Meaning (Plus 9 Things You Should Know)

It will typically describe the purchased items, price, and other important information such as the shipping weight and transport charges. A proforma invoice is simply a quote prepared by the exporter to resemble a commercial invoice. An international sale often begins with a letter of inquiry from a potential buyer expressing interest in one or more of your products, outlining the terms of their interest and asking for an informal or formal quote. Lenders and investors will require such statements to structure or confirm compliance with debt covenants such as debt service reserve coverage and debt to equity ratios. Similarly, when a new corporation is envisioned, its founders will prepare pro forma financial statements for the information of prospective investors.

Understanding pro forma invoices: A complete guide

Each computer is different and should be checked at the shop before checking the exact dimensions. When a deal is verbally or mutually confirmed, XYZ company can send a proforma invoice to the customer who inquired about a particular item. The company can list all the details of the proposed sale to the consumer.

Even before you’ve started procuring raw material or hiring the required workforce, you can send a proforma invoice to your international client as a preliminary bill of sale. Traditional invoices confirm a purchase or sale, whereas proforma invoices are just a way to establish the terms of the sale. A proforma invoice is a non-legally binding „pre“ invoice that is used to establish the terms of an order before an actual purchase order is sent. Not all companies need to use proforma invoices, but we’re going to outline exactly what a proforma invoice is and what situations they are best for — that way you can determine if it’s the right call for your business. Regular invoices, on the other hand, are sent after an order is completed and outline what has been purchased and how much should be paid. They contain all the necessary payment information that is needed for customers to pay for their orders.

What is the difference between a proforma invoice and a commercial invoice?

The proforma contains a lot, if not all, of the same information that will appear on the final sales invoice, but it does not have the same legal significance and is used for accounting purposes or as a binding contract. In many ways, proforma invoices are more like quotes than final sales invoices. If an invoice is not issued for payment reasons, and only for customs reasons, this is known as a pro forma invoice. You will encounter documents like these in international trade relations in particular.

Proforma invoices are just a more detailed version of a quote since they typically include more information and are in a format close to your traditional invoice. There are no set rules for what should appear on a pro forma invoice, although certain information is common and recommended. A quote provides information about what a customer can expect from a transaction before it has been agreed. It is essentially a „good faith“ agreement between you (the seller) and a customer so the buyer knows what to expect ahead of time. Since a pro forma is more like a quote, the terms are subject to change.

The ability to add company, customer and payment details, then send directly from the Tide app, helps you issue invoices and get paid faster. Simply connect your existing business account to Tide and start creating professional invoices. While proforma invoices aren’t legally binding documents and they can’t be used for accounting purposes, they do have some unique functionality. Proforma invoices are not legally binding and are not counted as official sales in your accounting department. It’s a document that business owners and customers use to establish and agree upon the terms of an order. The pro forma invoice describes the work that will be done and details the cost of an order, as well as any additional charges, including applicable taxes and fees.

Now that you have your proforma invoice, it’s important to know when to send it. Naturally, you’ll need to ensure your customer receives the finalized proforma invoice before the work or goods are delivered. However, you don’t want to send a final proforma invoice before negotiations have concluded. Pro forma in Latin stands for ‘for the sake of form,’ implying that it is only a provisional document and will eventually be followed up with an official document.