In simple terms, a proforma invoice is a preliminary invoice sent by the seller to the buyer in advance containing the terms of sales. It notes crucial information about the purchased items as well as other relevant information, such as transportation charges. 

Proforma invoices are also used for customs purposes in the importation and are never included in accounts payable and receivable. They play a weighty role in ensuring a client pays on time, and they can be used to calculate the profitability of business at the end of the year.

What is the purpose of a proforma invoice?

The primary purpose of a proforma invoice is to streamline the process by making sure customers first agree to the prices before shipping or delivery. Once the customer receives the proforma invoice and happy with the price, then the seller proceeds to send the goods and services. In a nutshell, a proforma invoice allows a buyer and seller to agree on sales terms upfront. It further creates a room for updates, thus eliminating the need to issue a credit.

While a proforma invoice contains exact information associated with the sale, it is not an official demand for payment. It is just a good faith estimate of what the buyer expects at the end of the sale. You can present a proforma invoice in any format. No limitations.

Other uses of a proforma invoice include:

• It is ideal when a seller doesn’t have all information required for a commercial invoice. 
• It can be used to declare the value of goods for customs for a smooth delivery process. 
• You can use it for the internal purchase approval process.

Commercial and proforma invoices, and U.S. customs

It is a requirement to submit specific documentation before goods pass through customs in the United States. Both commercial and proforma invoices are used for customs. A traditional invoice list key information such as seller and buyer details, quality, location of purchase, the value of the item, and its description.

A proforma invoice only lists enough information needed for the general examination of the included goods. Any company that uses a proforma invoice for customs must present a commercial invoice within 120 days.

How to issue a proforma invoice 

The obvious way to issue proforma invoices is through Excel and Word templates. All you need to do is to adjust the proforma invoices templates in Excel and Word. You can as well use invoicing software to create professional proforma invoices.

Crucial information to include in a pro forma invoice 

• Detailed description about the product 
• Contact details of seller and buyer
• The value of the product
• The expiration date of the proforma invoice
• Delivery terms, such as the package origin and the delivery location
• Total due
• Date of invoice 

Pro forma invoice vs. invoice 

While a proforma invoice shares some similarities with an invoice, these two are not the same. One notable difference is that an invoice is a legal document, while a proforma invoice is not. That means:

• A customer is not supposed to make any payments when issued a proforma invoice.
• A seller is not supposed to record a proforma invoice as an account receivable. This is because a proforma invoice is not a valid invoice. Again, the buyer is not to record it as accounts payable because it is essentially a draft invoice.

Pro forma invoice vs. quotation

There are a lot of similarities between a proforma invoice and a sales quotation. For example, both notify a customer on how much to pay at the end of the sale. They are also issued at the point in the sales process. That is before a sale is completed. 

However, there exists a difference between them. A proforma invoice shows a customer’s commitment to buying a particular product or service. A quotation does not represent such commitment but rather recognize a customer’s interest.

Best practices of handling proforma invoices

While a proforma invoice is essentially a draft invoice, there are best practices buyers can still follow. These practices include:

• Advising sellers to include information transferable to other forms, such as a commercial invoice. This is very crucial when dealing with export sales.
• Pay keen attention to the date of the proforma invoice. This is because things like international fees, material costs, and currency are bound to change depending on the market.
• While the proforma invoice is subjected to changes, it still should be as close to the actual sale as possible.

Example of a pro forma invoice

A landscape customer agrees to the price of lawn care services on the proforma invoice, and the owner of the business will deliver the services once they are ready. The customer pays when he gets the invoice. The final invoice amount will be equal or close to the figure on the pro forma invoice.