A proforma invoice is a document that a business can use to confirm the terms of an agreement to supply goods or services to a customer. It usually includes a description of what will be provided, the price, the payment terms, and other relevant details about the transaction. It's similar to a quote, and it's a handy business tool.
In this post, we’ll look at what proforma invoices are, why they’re important, and how they can be generated and used most effectively.
Understanding proforma invoices
You can think of a proforma invoice as a preliminary draft of an invoice. It's an informal agreement between a supplier and a customer, and it lets the customer know what to expect in a future invoice.
Proforma invoices are often issued once the buyer and seller have negotiated prices and other relevant terms. They aren’t legally binding documents like actual invoices are, but they can have legal consequences.
“Pro forma” means “for the sake of form” in Latin, and this hints at this document being provisional or a step in a process.
Is using proforma invoices mandatory?
No, it's not mandatory. Proforma invoices don’t have fiscal validity like invoices (in other words, a business can’t use them to prove a purchase to a tax authority). Proforma invoices are not regulated and don’t have to be shared with authorities. While many businesses do use proforma invoices, others might use a different quote format, have a simple price list and standard terms, or go straight to a formal invoice.
As we’ve said, proforma invoices are not legally binding as they stand, but they can have legal consequences once they’re "accepted." For example, a car repair shop might ask you to sign and approve a proforma invoice before they start work. Once you’ve signed the document, you can't go back and say, "I didn't know it'd cost that much!"
When is a proforma invoice used?
A proforma invoice is used when a seller and a buyer have made a tentative agreement but have yet to finalize a deal. They are useful for confirming what has been promised to a customer. These documents are often issued after sales negotiations, toward the end of the sales process.
Proforma invoices are especially helpful when a company provides high-value goods or services or products manufactured to order. So they’re worth considering if that's the case for your business.
We’ll talk about how they’re commonly used in international trade later in this post.
Are proforma invoices, invoices, and quotes different documents?
Yes, these three documents serve different purposes. Here’s an example of how a company uses all three in its sales and fulfillment process.
- Company X is building a new website design for Client Y. After initial meetings, Company X sends a quote.
- Client Y decides on a few changes to the project deliverables and asks for a slightly better price. Company X agrees to the new price and issues a proforma invoice.
- Once the work is completed, Company X sends the final invoice to Client Y.
Next, we’ll delve into the features of invoices and quotes and how they compare with proforma invoices.
Invoice vs. proforma invoice
What is an invoice?
An invoice is a legally binding document requesting payment for goods and services. These official commercial instruments are required and regulated by tax authorities. They have fiscal validity — that is, they prove a transaction and deduct VAT.
Every country has its specific VAT regulations and rules relating to invoices. More than 40 countries have also introduced some form of mandatory e-invoicing or e-reporting requirement.
How does a proforma invoice compare to an invoice?
A proforma invoice contains almost all of the same information as an invoice, excluding the invoice number. The document will also clearly state that it is “proforma.”
A proforma invoice is not used for accounting or taxation purposes, and its intent differs. It is a quote or a promise to supply goods or services according to the terms outlined, not a payment demand.
Quote vs. proforma invoice
What is a quote?
A quote simply confirms the price of goods or services. Quotes can be as simple as a letter outlining what will be provided and a price. Businesses use them earlier in the sales process than proforma invoices. A customer requesting a quote often wants to compare prices from different suppliers.
Quotes can be provided without prior negotiation and become the basis for price or service negotiation. Once negotiations are complete, a business might then send a proforma invoice to confirm the final price — usually before work begins or goods are provided.
How does a proforma invoice compare with a quote?
Compared with a quote, especially when a business uses both in its sales process, a proforma invoice is more of an agreement or a deal.
Some companies use a system of issuing a quote and then sending an invoice, skipping the proforma invoice. Others might use all three documents.
A proforma invoice leaves room for the customer to question or counter the price or terms, as it’s not a final bill of sale.
Why are proforma invoices important?
Sellers use quotes and proforma invoices to confirm prices and deliverables with buyers. Using them guarantees that there are no surprises to a customer when a final invoice arrives. With this in mind, a proforma invoice must be updated with any changes that result from later negotiations.
Using proforma invoices for international trade
Proforma invoices can be particularly useful to businesses serving international markets, because prices, deliverables, and regulations can change from country to country.
The International Trade Administration describes a proforma invoice as a document used as a “negotiating tool between the seller and the buyer before an export shipment” and says that one should be used to “quote at the beginning of an export transaction.”
The trade body also confirms that the proforma invoice will become the final commercial invoice after the goods arrive at their destination and are cleared through customs. Learn more from the International Trade Administration.
Customs authorities will review a proforma invoice description of shipped goods as part of their checks and issue charges.
What is included on a proforma invoice?
There are no formal guidelines for what must be included on a proforma invoice. Companies can include as little or as much information as they desire. However, the general expectation is that proforma invoices follow the same format as final invoices and contain the same key information, excluding the invoice number.
Typical fields found on a proforma invoice
Most proforma invoices contain the following information:
- The issuing company’s name, address, and contact details
- The customer’s name and address
- The date of issue and due date
- A description of the goods or services provided
- The price and applicable VAT
- How long any pricing is valid
- A link to any terms and conditions
- The expected payment terms
- Information relevant to international shipping and/or customs, where appropriate
- Confirmation that the document is a proforma invoice
How to create a proforma invoice
Remember that the goal of a proforma invoice is to help your customer understand what to expect in their final invoice. The best route is to make your proforma invoice look very similar to that invoice.
How you create proforma invoices and who is responsible will vary depending on the size and structure of your organization. Your sales team might create proforma invoices, or the task might fall to your accounting team.
Creating proforma invoices using Google Docs or Microsoft Office
As a sole trader, entrepreneur, or small business, you may be scaling to meet demand, so using Google Docs, Google Sheets, or Microsoft Office to create quotes or proforma invoices is a perfectly viable solution. All provide easy-to-use templates in a variety of formats.
Creating proforma invoices using accounting and invoicing software
As a growing or small- to medium-sized business, your chosen accounting and invoicing software — for instance, Sage or Quickbooks — or even your sales platform will allow you to generate clearly labeled proforma invoices quickly.
Your system should also be able to populate the final invoice from your proforma invoice, so you can confirm the most recent information and create your fiscally valid formal invoice.
For more on creating proforma invoices, check out these resource pages provided by accounting software companies:
Automating proforma invoicing
As an enterprise-level organization, you almost certainly already use sales and accounting software to generate proforma invoices and invoices.
Your business challenge might be automating or integrating your e-invoicing processes to ensure compliance within the countries where you operate.
Creating invoices for international markets
As we’ve noted, businesses are increasingly required to meet regulations related to not only formal invoice copies but also e-invoicing.
If you supply multiple international customers, your sales and accounting systems must quickly identify the rules applicable to your customer's country and generate e-invoicing that is compliant in that region.