← Back to Blog

What is Proforma Invoice? Why and How to Use It?

No items found.
12
minute read
Try Bonsai invoicing for free
Try Bonsai invoicing for free
Try it free
Updated on:
December 21, 2023
December 21, 2023
Table of contents

International trade can seem like a maze with lots of documents and steps to follow. It can be confusing and easy to make mistakes. But there's a tool that can help make things clearer and set clear guidelines for everyone involved. This is the proforma invoice. It's a document that outlines the details of a deal before it's final, making sure everything is transparent and communication is smooth between parties.

What is a Proforma Invoice?

A proforma invoice is a preliminary bill of sale that provides buyers with the estimated costs and terms of sale before they commit to purchasing goods or services. It serves as a guide that reduces the risk of misunderstandings or errors in the purchasing process.

However, keep in mind that a proforma invoice is directional only and is not legally binding.

How Does a Proforma Invoice Work?

Consider your proforma invoices as a placeholder. It establishes explicit expectations between parties and holds the place in the books until the final invoice is issued. Pro forma invoices are typically issued at the time an order is placed, providing a reference point for the buyer to address any queries they may have regarding the cost or date of delivery. To create a proforma invoice, it is essential to have accurate information about the transaction. For any further clarification, you can refer to proforma invoice FAQs!

Who Prepares a Pro Forma Invoice?

The seller or service provider is tasked with the creation of a proforma invoice. It involves listing the invoice items, calculating the price and sales terms, and providing all relevant details.

Employing a simple invoicing tools or software like Bonsai can simplify this process, guaranteeing that all essential information like payment terms is included and displayed clearly and systematically.

When is a Proforma Invoice Issued?

As a small business owner, issuing proforma invoices can be beneficial in several scenarios. If you're dealing with a new customer who hasn't yet established credit terms with your business, a proforma invoice can help ensure payment will be made. It's also useful when the final sale price cannot be determined at the time of order, such as when dealing with custom orders or services. Additionally, if you're exporting goods, a proforma invoice can be used to provide detailed information about the transaction for customs purposes. Overall, a proforma invoice can provide clarity and security in various business transactions and should be a part of your small business strategy.

Purpose of a Proforma Invoice

papers, projects, documents

Much like a Swiss army knife, a proforma invoice serves various purposes. It is used as a preliminary document to give buyers an estimate of costs and a detailed breakdown of goods or services. While it doesn’t hold legal binding, it assists in streamlining business operations and mitigating risks, delays, or confusions in customs operations.

Let’s examine these purposes more closely.

Accounting Purposes

Within accounting, proforma invoices can help get a clear picture of future transactions, including accounts payable. They are not recorded as receivables in accounting as they are not comprehensive records of a transaction like formal invoices. However, they do provide a reliable source of cost estimates and a preview of upcoming transactions, allowing businesses to make informed decisions and plan their finances accordingly.

Request for Payment

Though a proforma invoice could appear as a request for payment, it serves more as a gentle reminder. It provides an estimate of costs, but it’s not a legally binding demand for payment.

For the Sake of Form

Lastly, proforma invoices serve a formal purpose, solidifying an agreement on the sale terms between both parties. It’s like a handshake at the beginning of a business meeting, setting a cordial tone and making sure both parties share the same understanding of the proposed transaction.

Legal Document Status of Proforma Invoices

You may question the legal standing of a proforma invoice. Is a proforma invoice legally binding? Simply put, no. A proforma invoice, similar to a gentleman’s agreement, is not legally binding and cannot enforce a payment demand. It’s a handshake agreement rather than a signed contract.

Difference Between a Proforma Invoice and Other Types of Invoices

Much like currencies that hold different values and serve different functions, invoices also vary. Let’s contrast a proforma invoice with other prevalent invoice types.

Commercial Invoice

Similar to how a passport is used to verify one’s identity at customs, a commercial invoice is a mandatory shipping document employed by customs, banks, and other entities to document the actual sale and solicit payment for goods or services. It’s generated after the goods have been delivered or shipped, and multiple commercial invoices can be collectively referred to as commercial invoices.

Sales Invoice

A sales invoice, on the other hand, is more like a restaurant bill. It’s issued upon the delivery of goods/services and is legally binding, marking the official end of a transaction and the start of the payment collection in the sales process.

Tax Invoice

Then we have the tax invoice, which is like a receipt you get after a purchase. It’s used to collect payment for services rendered and includes tax details, thereby serving as evidence of a sales transaction.

Preliminary Invoice

A preliminary invoice, much like a proforma invoice, is sent to a client ahead of the actual invoice and serves as an estimate of the cost of goods or services. However, there are subtle differences between the two. While both are preliminary documents and not legally binding, a preliminary invoice is typically more detailed and closer to the final invoice in terms of the specifics of the transaction. It usually includes a detailed breakdown of the goods or services, along with their costs. It's often used in situations where the total cost is not yet known but a rough estimate is needed for budgeting or planning purposes.

On the other hand, a proforma invoice is a less detailed document, often used in international trade to declare the seller's intent to deliver goods or services to the buyer at a specified price. It provides an overview of what the final invoice will look like and is often used for customs purposes in import and export scenarios. It's worth noting that while both documents serve as estimates, neither guarantees the final price, which can still change based on the final invoice.

Regular Invoice

A regular invoice is like a final bill an individual receives at the end of a meal at a restaurant. It’s a legally binding document that requires a customer to pay the vendor for goods or services.

Official Invoice

Lastly, an official invoice is a document that provides a comprehensive record of a transaction between a buyer and a seller. Much like a written agreement, it includes all the important details of a transaction and is used for accounting and tax purposes.

If you're not sure where to start, Bonsai has multiple invoice templates that you can pick from, including a proforma invoice template:

Components of a Proforma Invoice

A proforma invoice, similar to a building blueprint, comprises of several elements that shape its overall structure. Utilizing a proforma invoice template can help streamline this process, ensuring all necessary components are included, as a sample proforma invoice typically includes these elements.

Let’s investigate these integral components.

Seller's Details

The seller’s details section of a proforma invoice is like the return address on a letter. It includes the name, address, and contact information of the seller. This information is crucial for establishing trust and facilitating communication between the seller and the buyer.

Buyer's Details

On the other side of the coin, we have the buyer’s details. It’s also crucial for establishing trust and enhancing communication between the buyer and the seller.

Invoice Date and Number

The invoice date and proforma invoice number on a proforma invoice are like the date and reference number on a letter. They provide a timeline and an easy reference for tracking the invoice. However, unlike a regular invoice, a proforma invoice often lacks a unique invoice number.

Description of Goods or Services

The detailed description of goods or services on proforma invoices provide a comprehensive overview of what the buyer is purchasing. This detailed list aids in ensuring a clear understanding of the transaction.

Quantity of Items

The quantity of items on a proforma invoice indicates the exact number of each item being purchased. This ensures there is no confusion about the amount of each item and helps avoid any misunderstandings.

Unit Price and Total Price

The unit price and total price on a proforma invoice provide a clear understanding of the cost for each item and the total cost for all items combined. This information allows the buyer to calculate their total expenditure.

Shipping and Delivery Details

Shipping and delivery details include:

  • Shipping method
  • Shipping terms
  • Delivery address
  • Estimated delivery date
  • Shipping costs

These details are crucial for ensuring a smooth delivery process.

Payment Terms

The payment terms on proforma invoices are like the terms and conditions of a contract. They specify the terms under which the buyer is required to make a payment, thereby preventing any misunderstandings or disagreements.

Validity Date

Finally, the validity date on proforma invoices is like the expiry date on a coupon. It provides information on the timeframe within which the invoice is valid, thereby ensuring that both parties are clear about the deadline for the transaction.

Try invoicing with Bonsai and get paid
Start free

Benefits of Using a Proforma Invoice in International Trade

A proforma invoice streamlines various aspects of international trade, running like a well-oiled machine, and presents a plethora of benefits. It aids in:

  • Streamlining communication
  • Defining terms
  • Smoothing out customs procedures
  • Ensuring financing.

Clear Communication

In the world of international trade, clear communication is paramount. Like a universal translator, a proforma invoice facilitates clear and transparent communication by providing all the necessary information about the transaction. It ensures that both parties are on the same page, thus reducing the risk of misunderstandings and disputes.

Outline of Terms

A proforma invoice is like a blueprint for a transaction. It outlines the terms and conditions of the sale, providing a clear understanding of:

  • the costs
  • the goods
  • the services
  • the delivery timeline

This not only helps to avoid potential disputes but also promotes transparency within the transaction.

Facilitates Customs Procedures

Much like a passport facilitates international travel, a proforma invoice smoothens the customs procedures in international trade. By providing all the necessary information about the goods being shipped, it helps customs authorities determine the applicable duties and taxes.

Helps Secure Financing

In the world of business, financing can often be a challenge. But with a proforma invoice, it’s like having a golden ticket. It provides a framework for negotiations and can be used to secure financing or letters of credit.

Budgeting and Planning

For small business owners, a proforma invoice can be an invaluable tool for budgeting and planning. It allows you to anticipate the cost of goods or services before the final invoice arrives, enabling you to manage your finances more effectively. By providing a detailed preview of upcoming transactions, it aids in making informed decisions, ensuring that your business operations run smoothly.

Preventing Misunderstandings

For small business owners, proforma invoices act like a safety net, helping to prevent misunderstandings in international trade. It provides a clear, agreed-upon roadmap of the transaction details, ensuring that all parties are on the same page. By outlining the terms of the deal upfront, it minimizes the risk of disputes and keeps business operations running smoothly. This makes it a valuable tool in your small business toolkit.

Confirming Transaction Details

For a small business owner, a proforma invoice serves as a concrete confirmation of transaction details prior to the finalization of a deal. It meticulously outlines the terms of sale, prices, and delivery details, providing a clear roadmap for the anticipated transaction. This clarity can significantly reduce potential misunderstandings or disputes, thereby ensuring smoother business operations and fostering stronger relationships with clients in international trade.

Pro Forma Invoice vs. Final Invoice

As a small business owner, you might wonder about the difference between a pro forma invoice and a final invoice. A pro forma invoice is like a preliminary sketch of the transaction - it outlines the estimated costs and terms of sale before the deal is finalized. On the other hand, a final invoice is like the finished painting - it's the legally binding document that is issued after the goods or services have been delivered, indicating the actual costs and solidifying the terms of the transaction.

How To Create a Pro Forma Invoice: A Guide for Small Business Owners

Creating a pro forma invoice might seem like a daunting task, but it's simpler than you think, especially when you're using an invoicing software like Bonsai. Here are the steps to create a pro forma invoice:

  1. Identify Your Business: Start by clearly stating your business name, contact information, and your business logo if you have one. This helps to make your invoice professional and easily identifiable.
  2. Identify Your Customer: Include the name and contact information of the customer. This ensures that the invoice gets to the right person and provides a point of contact for any queries.
  3. Include the Date and Invoice Number: This helps to keep your invoices organized and makes it easier for both you and your customer to track payments.
  4. Describe the Goods or Services: Give a detailed description of the goods or services being sold, including any relevant details like size, quantity, color, model, etc.
  5. Include the Price: State the cost of each item and the total cost of the invoice. If any taxes or additional fees apply, these should also be included.
  6. Specify Payment Terms: Clearly state the payment terms, including how and when payment should be made. This helps to avoid any confusion or misunderstandings.
  7. Include a Validity Date: This is the date until which the invoice is valid. It provides a clear deadline for the customer to make the payment.

Creating a pro forma invoice becomes even easier when you use invoicing software like Bonsai. It automates many of the steps above, saving you time and reducing the risk of errors. Plus, it makes it easy to track your invoices and payments, so you can keep your finances in order.

Is a Pro Forma Invoice Legally?

As a small business owner, you may wonder if a pro forma invoice is legally binding. The answer is no, it's not a legally enforceable document, but rather a preliminary agreement outlining the estimated costs and terms of a sale.

Key Takeaways

  • A proforma invoice is a preliminary bill of sale outlining estimated costs and terms of sale, used to clarify cost and delivery details prior to the final invoice.
  • It provides an estimate for upcoming transactions, aiding in streamlining business operations and mitigating risks.
  • A proforma invoice offers benefits such as improved communication, clarified terms, streamlined customs procedures & secured financing in international trade.

Frequently Asked Questions

What is the purpose of proforma invoice?

A proforma invoice is a preliminary bill used to request payment from the buyer before goods or services are supplied. It ensures both parties have agreed to the terms from the beginning and helps avoid any unexpected charges or duties.

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

A proforma invoice is an estimate of the cost of goods or services, used to secure payment before delivery. A commercial invoice, on the other hand, is a legally binding document stating the total amount due and requesting payment after the goods have been delivered.

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

A proforma invoice is a quote from a sale, not an official confirmation of a sale, and the terms in it are still subject to change. In contrast, a purchase invoice is a legally binding agreement between the buyer and seller.

Should you pay a proforma invoice?

It is important to remember that a proforma invoice does not require payment, nor does it mean the seller needs to ship the goods. Therefore, payment should not be made on a proforma invoice since it does not meet the requirements for a formal invoice.

How does a proforma invoice work?

A proforma invoice serves as an agreement between the buyer and seller, outlining the goods or services to be provided and setting payment expectations for the transaction. It works as a placeholder until the final invoice is issued.

Try Bonsai invoicing for free
Related Articles