Did you recently receive a bill titled “Proforma Invoice?”
Are you wondering what a Proforma Invoice means and why you got it?
If your mind is riddled with these questions about Proforma Invoice, stick with us till the end – we’ll resolve all your doubts in this article!
What is a Proforma Invoice?
In layman’s terms, a Proforma Invoice is a preliminary bill or invoice that sellers send to their clients (prospective buyers) highlighting important information about the purchased products or services. Essentially, this invoice depicts the estimated prices of products/services, invoice number, terms & conditions, shipment weight, commissions (if any), taxes, shipping costs, etc.
Sellers need not follow any strict guidelines or a set format for presenting the same to their clients. Typically, Proforma Invoice is used in export-import trade for computing the customs duty payable on the exported or imported goods. It must only include the relevant information that is enough for the customs department to decide what duties to levy by conducting a general examination of the goods in a shipment.
This invoice is always issued by the seller to their customers before the commercial invoice is sent to them. Since the invoice is sent before the actual sale, it is not required to be added to the accounting books of the buyer or the seller.
When is a Proforma Invoice used?
As we mentioned earlier, the Proforma Invoice is offered by the seller before the actual sale occurs. It is primarily used for customs purposes to facilitate a smooth and hassle-free delivery process. A Proforma Invoice may also prove to be useful in the following situations:
- If the goods get damaged in transit: If the customer receives goods that may have been damaged during the transit, you need to raise a credit claim against the original invoice.
- If a customer changes the order: If customers wish to change their order after the delivery, you must again raise the initial invoice.
In both of these situations, if you have a Proforma Invoice, you can simply make the necessary amends to it and convert it into the final sale invoice. The entire process becomes much easier for you, while also guaranteeing customer satisfaction.
Although the usage of this invoice varies from business to business, it acts as a representation of good faith between the buyer and seller. Since it gives the buyer a fair estimate of the relevant product details, they will not be exposed to any unexpected or unreasonable charges during the final transaction.
Many business use this invoice for internal purchase approval process.
What are the contents of this invoice?
A Proforma invoice is supposed to be concise and informative. It should only present the details that are relevant to the customer, such as:
- The company name and logo.
- The unique invoice number.
- The date of issue of the invoice.
- The seller’s address and the prospective buyer’s address.
- The description of product/services, including the unit costs and total of the list items.
- The validity of the invoice.
- The proposed terms of sale, payment, and delivery.
- The certifications required (if any) by “Customs Authorities.”
- The signature of the seller or any other authorized personnel of the company.
What is the purpose of using this invoice?
The Proforma Invoice declares the seller’s commitment to delivering the desired products/services to the prospective customer. While it shows the understanding of the seller about the goods to be shipped, it also informs the buyer about the product and payment details.
These invoices are also particularly crucial when two enterprises enter into a business agreement for the first time. It acts as an informal binding agreement between the two parties, where both are aware of the terms and conditions of doing business.
While this Invoice gives the seller a payment confirmation from a potential buyer before the goods are delivered, it also allows the customer to make any modifications in their shipment before the final transaction happens.
Sellers use Proforma Invoices for the following purposes:
- To inform the potential buyer of the estimated sale price of a product/service yet to be delivered and also the total cost of the shipment.
- To give a clear declaration of the contents of a shipment, their value, shipping costs, and other important details to the buyer.
Proforma invoices for small businesses
A small business has a lot to do when it comes to ensuring good dealings with clients. As the owner of a small business, you are no stranger to negotiations. Proforma invoice is the tool that allows you to negotiate with your clients seamlessly.
Using myBillBook’s proforma invoice templates, you can ensure that you and your clients are on the same page. A proforma invoice is sent before the final invoice. It is how you let your clients know all the details- including what products and services are being delivered, what the cost of the project is going to be, and when the transaction is going to complete. With the right proforma invoice template, you make sure that there is room for discussion before reaching the stage for final payment.
myBillBook offers you carefully designed invoice templates that let you specify the details of the work you do for your client. Using these templates, you can establish trust in your dealings with clients and let them prepare for paying you.
There are many reasons why a small business should use good proforma invoice templates. By using these templates, you can easily accomplish multiple crucial tasks such as:
- List out the services being provided by your business
- Make your clients aware of all the product delivery details and dates
- Acquaint them with the due date of payment and all the terms
- Outline the value of all products and goods for customs
- Send them a complete statement of how much the project is going to cost
- Inform them of all the payment methods you accept
As a small business, you can rely on myBillBook’s detailed proforma invoice templates to implement effective communication and forge long-lasting relationships with clients.
What is the format of a Proforma Invoice?
Like we said earlier, this Invoice is not mandated by the law and is purely offered to establish good faith between the buyer and seller. Naturally, there’s no standard industry guideline dictating the format of a Proforma Invoice – it may even look like a sale invoice. It is considered to be among the best practices of business.
However, an important thing to remember here is, a Proforma Invoice must be marked as “Proforma Invoice” to indicate that this is not the final sale invoice. It may also include the phrase “This is not a GST invoice” to avoid any confusion on the part of the customer.
Here’s a invoice template for your understanding:
What’s the difference between Invoice, Proforma Invoice, and Purchase Order?
We’ve explained the difference between Invoice, Proforma Invoice, and Purchase Order in the table below:
|Invoice||Proforma Invoice||Purchase Order|
|Denotation||It is a bill or document provided by the seller to the buyer, listing the details of products/services delivered.||It is an initial bill provided by the seller to the prospective buyer, listing the details of the goods yet to be delivered, to the customer.||It is a document issued by the buyer to the seller detailing the list of items that the buyer wants to purchase.|
|Purpose||It is sent to notify the buyer of the payment due.||It is provided to the buyer to give a clear idea of the estimated costs, helping them to take the right purchasing decision.||The buyer sends this to the seller to notify them about the desired products/services, so they can arrange the required items accordingly.|
|Time of issue||It is issued before the seller receives the due payment from the buyer.||It is issued before the goods are delivered to the prospective buyer.||It is issued after the buyer receives the quotation receipt or Proforma Invoice from the seller.|
|Final impact||Sale confirmation||Sale creation||Sale contract|
Proforma Invoice FAQs
1. Is a Proforma Invoice an authentic document?
Yes, it is an authentic document issued by the seller to provide the customer with a general understanding of the transaction that is about to take place. However, it is not a final sales invoice.
2. Can you include the Proforma Invoice in the Book of Accounts?
Since this invoice isn’t a commercial invoice, it cannot be included in the Book of Accounts.
3. Is a Proforma Invoice binding upon the two parties involved?
No, this invoice is more like a sample invoice providing the general idea of the product, total costs, shipments costs, etc. It is not mandated by law, but only a standard best practice in business. Hence, it is not binding upon the seller or the buyer.
4. For how long is a Proforma Invoice valid?
The validity of this invoice depends on the seller. It differs from business to business. Generally, the validity period is mentioned in the document.
5. How to revise a Proforma Invoice?
If a customer changes the order or makes any other changes in the contents of the Proforma Invoice, the seller must update the invoice number.