To fully understand when you need to use pro forma invoices, you will first need to know what they are.
Read on further to gain the knowledge you need and increase your overall understanding of pro forma invoices and when to best use them.
What is a pro forma invoice?
A pro forma invoice will be delivered before any work has been completed. It is a document that will list the products and services that are set to be provided, along with the total amount due. A proforma invoice generally acts as more of a notice of when payment will be required (the due date), rather than an outright request for payment like other invoice types.
Important information regarding shipping costs will be listed on a pro forma invoice, as well as an accurate sale price, and a description of the purchased products or services.
Why are pro forma invoices used?
The primary use of a pro forma invoice is to give customers, who are placing an order with a business venture, an idea of how much they are likely going to have to pay. Once a customer has committed to placing an order but hasn’t yet finalised the details of the sale or received any goods, they can receive a provisional bill of sales this way.
This invoice can describe the goods being bought and list the total amount payable, as well as any added tax or extra fees that may incur throughout the sale, so that the customer does get hit by any unexpected changes along the way. The paying customer will need to agree to the price on the pro forma invoice before being able to receive any products or services it covers.
A smooth and easy sales service is often provided when utilising a pro forma invoice as all things are agreed up front. The customer will be clear on what they will have to pay and what items they will be getting shipped to them. The seller, on the other hand, will also be comfortable as they will become aware that the client is happy with the terms of the deal.
Therefore, pro forma invoices usually prevent any form of discomfort with a customer once the goods are received and the invoice is finally sent.
Difference between traditional invoices and pro forma invoices?
A traditional invoice will contain a lot of information including the buyer’s and seller’s details, products and services being shipped, terms of payment, and a delivery date. A pro forma invoice will only issue general information, so that customers are able to calculate duties from examining the products they have ordered.
Advantages of a pro forma invoice
Here is a list of the key advantages you may want to know about before you create a proforma invoice:
- A smooth sales process is ensured
- All information a customer needs is included
- The details can be changed or negotiated as it is not a legally binding agreement
- Provides a strong understanding of the commitment to both seller and buyer
- Can be used as a stand in if some details required for a commercial invoice are not currently available
- Easy to check for errors or misunderstandings/miscommunication
Further understanding pro forma invoices
Unlike a traditional invoice, a pro forma invoice is not actually a request for payment, and it is not legally binding. Similarly to a standard invoice, the pro forma will list key information, such as details of products or services, the number of units being purchased, and any associated costs.
Multiple updated pro forma invoices may be sent to the buyer before an agreement is finally reached, this is because they are subject to both change and negotiation. Once the customer becomes happy with the details, an agreement can be finalised. Once the agreement has been reached, no unexpected charges should be dealt to the customer, as the entire point of the pro forma invoice is to give as precise an estimate as possible.
Because it isn’t actually a final invoice it does not require a unique sequential number. Therefore, it does not get included in accounting records as the customer has at that point not agreed to the terms. This all means that it holds no fiscal value.
Information that should be include on a pro forma invoice?
You will need to include an estimate of all fees relating to shipping costs and taxes, as well as an invoice number on a pro forma invoice. Also, a precise sale price is usually included here. Remember that pro forma invoices are generally known as estimates that aid the buyer in dodging any unexpected fees further down the line and are therefore subject to change.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.