With your business growing and expanding, keeping track of all your payments may be challenging without proper documentation, and this is exactly why you need an invoice.
However, depending on what you do, you may need a different invoice type. For example, suppose your product allows your customers to negotiate a price after negotiation. In that case, you want to ensure there is an agreement to that begins the negotiation process with the client c
This is where you’ll need a proforma invoice. It is an agreement that details an agreement’s resolve as it concerns price, discounts, and estimated delivery date. It is a document subject to change just like a blank invoice template, that follows up the negotiation to ensure that there’s some sort of written agreement to make things official. This document is what is called a proforma invoice.
What is a proforma invoice?
A Pro forma invoice is a tentative agreement that serves as a placeholder for an official agreement between the customer and seller. It guarantees that neither party can return to the agreement reached during the negotiation. A proforma invoice is to be followed by an official document as they are not official invoices.
A proforma invoice is usually described as a primary or preliminary invoice. They are also called Performa invoices. Because it is to show an agreement, it contains other information like the goods or services to be delivered, their prices, shipping information, and delivery date. Usually, the buyer acknowledges the pro forma invoice before the transaction can commence, after an official invoice is sent to the customer.
Uses of A Pro Forma Invoice?
Manage Expectations; Both the sellers and customers have expectations of each other. The seller expects payment, and the buyer expects a product or service. These expectations can sometimes go overboard, with one party expecting more than what the other person can provide. A pro forma invoice ensures this does not happen as it communicates the expected costs, fees, and delivery date for an order or product. While it is tentative, it gives an idea of what to expect from both the buyer and seller.
Aide Negotiation: Before an official invoice is sent, a Pro-forma invoice provides the buyer with an opportunity to negotiate the price, delivery terms, and other information that also pertains to the transaction. It also caters to instances where there is a disIf the buyer is dissatisfied with the price, quantity, or delivery timeline; they can contact the seller to negotiate and reach a mutually satisfactory conclusion.
Shows An Agreement: Although no legal agreement makes sending a pro forma invoice necessary, it shows an agreement between the sellers and the buyer. It establishes the supplier’s willingness to offer the goods and services at the discussed price, on the promised date, and exactly as agreed. It also shows that the service or product to be delivered is being delivered as a paid service. It indicates the acknowledgment that the service is not being rendered for free instead, and the buyer acknowledges that payment will be made at a specific time.
Saves Processing Time and Costs: With a proforma invoice, you can streamline the quote-to-cash process and get things moving as soon as possible. Since the proforma invoice also acts as a quote that gets quick approval, long processes are fast-tracked, consequently saving processing time and costs. The best part is if your business uses invoicing software to send out invoices, this ultimately saves more time and automatically confirms the agreement.
Makes The Sales Process More Effective: With a proforma invoice, businesses can streamline the sales process as both parties agree to the terms in the invoice before the transaction starts. This eliminates any conflict that may arise from the sales process and helps avoid disputes with additional production costs or unsatisfactory delivery.
Are a Great Fit for International Trade: The proforma invoice is much loved by businesses that deal strictly with import and export. This is primarily because U.S customs require them as this invoice contains all the details of the importer and the exporter and information about the goods involved in the transaction.
When is a proforma invoice issued?
A proforma invoice is issued at the start of the transaction, i.e., before the seller sells a product or begins the preliminary process of offering a service. It is issued right after the basic negotiation, and either kickstarts a second negotiation or the selling of the product or service.
It is issued at the start of a transaction to prove the commitment of a buyer to pay the stipulated price and at the stipulated time and the obligation of the seller to sell the product or offer the exact service specified in the invoice.
Format of a Proforma invoice
A proforma invoice contains the basic information a commercial invoice contains. The main components you’ll find are:
The document title “Proforma Invoice”
Shipper’s name and address.
Buyer’s name and address.
Invoice date of issue.
Invoice reference number.
Invoice expiry date
Mode of transport details.
The number of packages and weights.
Items with a description, price, and quantity.
Tax rate, shipping, and handling rate.
Total payable amount.
Terms of service
More information is contained in the document in the case of a proforma invoice for international trade. This is because specific details will be reviewed by the customs officers. The added information includes but is not limited to a description of the products, the exporter’s country details, and the product’s assigned category.
It’s important to know that the components of your invoice can be designed to cater to specific business needs. A Proforma invoice is flexible enough to reflect as much information as possible.
Is a Proforma Invoice Legally Binding?
Just like a commercial invoice is not legally binding without terms, a proforma invoice is deemed not to have enough information to be legally binding. This is also primarily because it is a tentative invoice and is still subject to change.
The proforma holds the fort until a commercial invoice with proper service and payment terms can be sent. Consequently, this type of invoice serves as a sort of quote and just shows a starting cost, not necessarily the agreed fees. A proforma invoice can still be negotiated and allows the customer to decide whether or not to go on with the transaction.
Proforma Invoice vs. Commercial Invoice
While they are both types of invoices, a proforma invoice differs considerably from a commercial invoice.
A proforma invoice helps create an excellent negotiation starting point between the customer and the seller. It contains the figures and terms that may or may not be negotiated by the customer.
Contradictorily, a commercial invoice has the final agreed amount and payment terms and contains the details of what is settled on after the proforma invoice is sent and discussed. The commercial invoice and not the proforma invoice is used for accounting purposes.
While both the Proforma and commercial invoices can be used as export documents in international trade, proforma invoices are more commonly used because they are easy to use to overcome import restrictions that could affect the sale.
Despite this, commercial invoices also play very crucial roles in international trade. It details the duties, taxes, and other import fees associated with the sale. All of which are essential information custom officers would be interested in knowing. So, both the proforma and commercial invoices are necessary for international trade.
In certain instances, the proforma invoice is an estimate and isn’t usually the final price to be paid. However, commercial invoices are generally the final amount to be paid for the product or service as it is issued at the end of the transaction and not the beginning.
Consequently, you’ll find that a commercial invoice is more detailed than a pro forma invoice detailing more information about the buyer and seller, purchase location, and a complete description of the goods.
Proforma invoice Vs. Quotation
A proforma is an official temporal document, and a quote, on the other hand, is an informal document. The two documents, however, are similar in that they offer price estimations on a service or product. However, a quote is sent in response to an inquiry about the cost of a product or a service.
Just like the proforma invoice, the amount in a quote is not final and can still be negotiated.
Despite this, the proforma invoice has a more detailed breakdown of costs and more information on the buyer and seller than a quote.
Usually, when a customer looks at the quote and wants to discuss it, a proforma invoice can still be sent to the client. However, a quotation is unnecessary if a proforma invoice has already been sent to the customer.
Finally, because the details on a proforma invoice can be edited and canceled, it is not a legally binding document, just like quotes. When the negotiation is, however, finalized and a commercial invoice sent, it may be considered a legal document.