What is a Proforma Invoice?
I hear many businesses use the term proforma invoice without really understanding what that means. What many actually mean is they’re not giving credit terms, i.e. requesting payment in advance.
You are trying to limit your exposure to potential bad debts by not giving credit terms, but that’s not the purpose of a proforma invoice.
The goal of a proforma invoice is to avoid exposing your customer to unexpected charges or duties.
So, what is a proforma invoice?
Simply put, a proforma invoice is a provisional bill of sale which you send to your customer before you deliver any goods or services.
The word provisional is critical.
A proforma invoice’s terms of sale can be changed; therefore, it only applies to sales that have not been completed.
It gives customers a good faith estimate of the cost of a sale and reduces the likelihood that they will be exposed to unanticipated charges. That reduces the risk of payment disputes when legal invoices are issued. It is not a demand for payment.
It is NOT a legal document as it does not contain a unique, sequential invoice number, which is required on all legal invoices and must be clearly labelled as ‘proforma invoice.’
Crucially, a proforma invoice has no monetary value and does not contain a payment method, so it should not be included in your accounting records.
What should be on a proforma invoice?
Whilst looking very similar to an invoice, it doesn’t contain all the same information.
As mentioned, it doesn’t have a unique, sequential reference number or a payment method.
As it’s not a legal document, there are no specific requirements except to be clearly labelled as a proforma invoice.
You should include, where applicable.
- The contact details for both you and your customer
- Date of issue
- A description of the goods or services
- The price of the goods or services
- VAT or any other taxes
- Shipping costs
- The total amount due
For most proforma invoices, prices are fixed, but elements such as shipping costs, taxes, commissions, or fees can be estimated. This is particularly the case for export sales.
How does it differ from a quotation?
Basically, this comes down to when it is issued.
A quotation is sent to a potential customer who has expressed an interest in buying from you. There is no obligation or expectation behind it, and it can be accepted or rejected without consequences.
A proforma invoice is a little more formal as it is usually, but not always, issued after the customer has committed to buy from you but before you have provided any goods or services, as some of the details are still to be finalised, such as the quantity.
It usually contains more detail than a quotation and is considered more binding than a quotation, though it is still not legally binding like an invoice.
Can you request payment on a proforma invoice?
A proforma invoice is not a legal document. That means the customer is not legally obliged to pay the amount shown on it. So, whilst a customer can pay you on receiving a proforma invoice, you will still need to issue a legal invoice for your and your customer’s accounting records.
This is unnecessary duplication of work if you don’t need to use proforma invoices for cost estimates or international shipping.
You must issue a legal invoice with an invoice number to request payment. Proforma invoices can also not be used to reclaim VAT.
What to talk more about how and when to invoice your customers. Why not book a call?