What is a pro forma invoice and how can you use it?
Tips / 30.12.2021
For those of you whose strengths do not lie in numbers, talking about invoices and pro forma invoices could, at the very least, be confusing.
However, as a business owner, it’s important to know the meaning of these terms so that you can run your business more effectively. So, what does a pro forma invoice mean?
Here’s all you should know.
Table of Contents
What is a pro forma invoice?
In more formal terms, sellers present this type of statement to the client as a courtesy before they enter a final purchase or transaction. A pro forma invoice will ultimately list the number of goods, a description of the items, their prices, and VAT, where necessary, as well as any other details to make the initial process of the buyer’s interest in your products a bit more formal.
And here, we’d like to emphasise the word “initial” because a proforma invoice is a preliminary bill of costs that is sent to a client before a merchant supplies any products or performs a service.
Let’s start with an example to clarify things and put them in perspective. Say that you own a business in the UK and you’ve got a client in Spain who’d like to order 50 leather sofas from you.
Before you ship your goods and before they make the last payment, your client will want something like a quote from you to know and expect how much they’d have to pay you. This is known as a pro forma invoice.
When to use a pro forma invoice?
Pro forma invoices, although commonly used in imports and trade transactions, can also be used in the following scenarios:
- To declare the value of goods for customs
- When you don’t have all the details required for a commercial invoice
- Some clients use it for their internal purchase approval process
- When items may be damaged in transit
- When customers may change their order
- When project scope may increase
Example of a pro forma invoice
The typical features of a pro forma invoice include:
- The words pro forma and also “this is not a tax invoice”
- The seller’s company name, logo, and address
- The current date and the expiration date for the pro forma invoice – this can be in 30, 60, 90 days’ time or more
- A description and list of the products and/or services that are being sold
- The quantities of each item
- Individual and total prices for each item being ordered
- Possibly the inclusion of tax rates, such as VAT and the amount
- The total amount the buyer will be required to pay
- Specifics about your payment details
What’s the difference between a pro forma invoice and an invoice?
First, a pro forma invoice doesn’t have a number like an invoice does. Second, it is not legally binding like an invoice is. This means it can be canceled without an obligation by the buyer to make a payment.
In addition, merchants do not use a pro forma invoice for accounting purposes like an invoice is and therefore, do not record it as such.
What’s more is that with a pro forma invoice, you can always change and amend the details prior to delivery of the goods or services and this does not limit you to sticking to a specific amount which could change later.
Advantages of a pro forma invoice
So, what are the perks of using a pro forma invoice? Let’s take a quick look:
- Ensures a smoother sales process
- Provides the customer with all the required information
- Details can be changed/negotiated
- Not a legal agreement
- Can be helpful in checking for errors
- Can stand in the place of an invoice if all the details aren’t available yet
- Can help with internal purchase processes
- Improves the understanding and commitment of both buyer and seller
Is a pro forma invoice legally binding?
As mentioned above, a pro forma payment is not legally binding, whereas an invoice is. An invoice is a requisite for accounting, whereas a pro forma invoice is not.
Now that you know more about what a pro forma invoice is, it’s not as scary as it may have first appeared!
Ultimately, this piece of paper or electronic item offers the buyer detailed information about their intended purchase without binding them to make a payment. It also doesn’t bind the seller, who does the invoicing.
Disclaimer: Please be aware that the contents of this article and the myPOS Blog in general should not be interpreted as a legal, monetary, tax or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.
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