What is Proforma Invoice
A proforma invoice is an invoice sent to buyers before a shipment or delivery of goods. The document typically includes information about the purchased items, shipping weight and transport charges.
The seller delivers the goods and issues a formal or standard invoice after the customer confirms the information on the proforma invoice.
Proforma Invoices for Small Businesses
Proforma invoices help small business owners to accurately and concisely declare the value and specifications of their deliverables. Automating the invoicing process can have a profound impact on the business, as well as offer benefits to both the buyer and seller, such as:
- Reduced processing time
- Greater accuracy
- Increased transparency
- Improved record-keeping
How do you use a Proforma Invoice?
Let’s say a printing company called Alex’s Printing Press gets a request to produce 100 personalised notebooks. Immediately after receiving the order, Alex starts acquiring the materials and begins the printing process without engaging in any discussion or confirmation. The manufacturing is finished in a short amount of time, and Alex sends the customer an invoice.
But, the customer is unhappy after reviewing the invoice because:
- The price is too high.
- The delivery date is too late.
- The payment terms are not what the client expected.
Now, Alex can discuss and create a new invoice for the client, but the process of changing everything on the invoice is time-consuming and chaotic. In such cases, a proforma invoice comes into the picture.
Instead of beginning the manufacturing process, Alex now creates a proforma invoice mentioning all the necessary details and sends it to the buyer. Once the buyer confirms the terms and conditions, Alex begins his process. This way, adopting a proforma invoice makes the process easier for both seller and buyer.
Benefits of having Proforma Invoice Formats
A proforma invoice helps an organisation in the following ways:
- The Proforma invoice format facilitates simple accounting by allowing the easy recording of each proforma invoice issued to a client or seller.
- To forecast sales, the billing team can use tools to extract data from a proforma invoice. A proforma invoice typically contains a precise sale price, making the process much easier.
- Standardised proforma invoice formats make it easier for businesses to estimate customers with minimal effort and error.
- Managing a company’s finances and working capital is now possible with proforma invoices.
- It helps companies adopt digital invoicing more quickly.
- Businesses and their clients can track and evaluate shipping and transportation costs over a predetermined period with the help of custom formats.
Ideal contents of a Proforma Invoice
As a seller, it’s essential to ensure that your customers or buyers understand what they’re getting into. You can do this by using a proforma invoice or an estimate; this way, there are no surprises when it comes time to present the final invoice.
- Be sure to mention “Proforma Invoice,” “Proforma Order,” or “Estimate” in the header rather than “Tax Invoice.”
- Buyer info, including name, address, tax ID, and contact information.
- Name, trademark, tax identification number, and address of the seller.
- Proforma invoices contain two key dates: the proforma date and the expiration date. The former is typically 30-60 days from when the proforma was issued.
- A list of the descriptions, quantities, and prices of each item sold in that order.
- The applicable taxes on the rate and amount of GST or customs duty.
- The amount a buyer owes along with payment methods if required.
How to choose the right format for a Proforma Invoice
Before selecting the format, one must go through the below list:
- When selecting the best proforma invoice template, consider the supplies provided to your customers and your organisation’s goals.
- The proforma invoice template is determined by how frequently you charge your customers.
- Also, choosing the suitable template for your company helps keep track of invoices and the payment options you provide.
What’s the Difference between Proforma Invoice, 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|
FAQs about Proforma Invoice
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.
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.
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.
What is proforma invoice validity?
The proforma invoice validity depends on the seller. It differs from business to business. Generally, the validity period is mentioned in the document.
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.