Everything you need to know about proforma invoices
A pro-forma invoice is a preliminary draft pre-invoice.
Proforma invoices are most useful in the following 3 scenarios:
Declare the value of a good-faith agreement between a seller and buyer for their own needs.
Declare the value of a cross-border shipment for customs purposes to obtain import/export permits and pay customs duties.
Analyze sales (e.g., periodic close rates, averages, estimates) as part of a vendor’s internal performance management process without affecting accounting records–because a proforma is not a true invoice and so cannot be used for accounting purposes.
Proforma invoice is not a mandatory requirement but it increases transparency, clarity, accountability and trust between buyers and sellers.
1. Streamline sales process by eliminating any unnecessary back-and-forth after a transaction goes through because all terms were agreed upon in advance.
2. Avoid significant unexpected charges once a sale is finalized by leaving no room for surprises.
3. Make customers comfortable by letting them know exactly what to expect, which is particularly useful when two parties are doing business together for the first time.
4. Expedite invoicing by allowing for an invoice to be issued as soon as a proforma is finalized.
5. Speed up the payment process by giving a buyer as much information about the order as soon as possible so that any necessary arrangements can be made efficiently (e.g., internal payment approval process, credit application, money transfer).
A proforma invoice is not a demand for payment, but only a preliminary sales proposal sent to committed customers who expressed an intent to buy so that the terms can be agreed before a commercial tax invoice is issued, at which point the buyer will become legally obligated to make a payment.
A proforma invoice is not entered as Accounts Receivable and Accounts Payable in the accounting records of a company because it is a negotiable preliminary sales proposal that is subject to change and does not legally bind either party in a transaction like a standard commercial tax invoice.
Proforma invoices are preliminary sales proposals that cannot be used to receive or reclaim tax and so should include both the tax information and a disclaimer “This is not a tax invoice”. When the terms of the sale are agreed, the seller will convert the proforma into a legally-binding tax invoice.
| Proforma Invoice Template | ||
|---|---|---|
| Header | “Proforma” title | |
| “This is not a tax invoice” or “Draft tax invoice” disclaimers | ||
| Contact details | ||
| Dates | ||
| Reference numbers | ||
| Main body | Product breakdown | |
| Cost breakdown | ||
| Shipping information | ||
| Footer | Terms and conditions | |
| Authorized signature | ||
Tip: A proforma invoice should be labeled as such–“Proforma”–and can even include disclaimers like “This is not a tax invoice / Draft tax invoice” to ensure a prospective buyer understands that this is only a draft preliminary estimate and not a final invoice, which would imply a demand for payment.
When both pro forma and commercial invoices are formatted similarly, using the same template, then all that needs to be done to convert an informal pro forma into a legally binding invoice is simply to modify these 5 elements:
1. Title: Change the document headline from a “Proforma Invoice” to an “Invoice”
2. Tax: Delete the phrase “This is not a tax invoice” / “Draft tax invoice” (if applicable)
3. ID: Assign a unique invoice sequential number
4. Dates: Change the dates (e.g., date of issue, date of delivery, payment due date and terms like Net D)
5. Terms: Adjust any terms of sale and legal language that are reserved for a commercial invoice (e.g., tax)
Essentially, a pro forma is a draft invoice. As a result, a pro forma invoice template is almost identical to a standard commercial invoice and generally contains the following particulars >>>
Even though a pro-forma invoice looks just like a standard invoice and contains much of the same information, its header should clearly state that the document is a “Proforma”–as opposed to just an “Invoice”–so that the enquiring customer knows it is only an estimate that should not be paid until the final commercial tax invoice is issued.
In addition to the “Proforma” label, a proforma invoice may also include the phrase “This is not a tax invoice”, where tax stands for VAT, GST or any other sales tax applicable in the relevant jurisdiction.
A proforma should not be assigned an invoice number because it is not a true invoice that would be legally binding for commercial and tax purposes. Instead, proformas can have their own unique numbering system, separate from the numbering sequence of the standard commercial tax invoices.
Describe each product or service being quoted, including the following details:
Estimate the total cost of an order–and provide an itemized breakdown of charges for each quoted product or service, including:
Pro forma invoices are often used in international trade to clear customs when a commercial invoice is not yet available or there is no sale between a sender and recipient (e.g., return or replacement of goods) to present the government authorities with additional shipping details required for import and export, such as:
In international trade, the content of proforma invoices is dictated by the regulatory requirements in the jurisdictions that are party to the transaction.
At the bottom of the document, a vendor may include any additional proposed terms of sale and miscellaneous information, instructions, notes and comments for the customer. For example:
If there is a designated person authorized to make sales offers on behalf of the vendor’s company, include the name, title and dated signature of this authorized signatory to finalize the document.
Even though a proforma invoice is subject to change, it should represent a good-faith best estimate, which is as close to the final invoice as possible, to avoid exposing the parties to any significant unexpected changes later in the sales process.
All changes to the proforma should be made with a buyer’s consent so that the customer is not surprised when the final commercial tax invoice is received.
Quotations, proformas and invoices are sales documents that sit on a spectrum from an informal negotiable estimate to a formal legally binding contract.
Quotation, or simply a quote, is an initial informal cost estimate that a vendor provides to a potential buyer in response to the prospective customer expressing an interest in making a purchase.
Proforma invoice is a semi-formal preliminary pre-invoice proposal sent to committed customers who expressed the intent to buy so that the terms can be negotiated and agreed before the finalization of the sale and delivery of goods or services.
Invoice is a formal commercial instrument that creates a non-negotiable legally binding contract between a seller and a buyer who are obligated to deliver the agreed-upon goods or services and make a payment, respectively.
| Proforma Invoice vs. Final Invoice: What’s the Difference? | ||
|---|---|---|
| Difference | Pro-forma Invoice | Final Invoice |
| Mandatory Use | No | Yes |
| Non-negotiable Legally Binding Agreement | No | Yes |
| Seller’s Accounts Receivable | No | Yes |
| Buyer’s Accounts Payable | No | Yes |
| Sales Tax Receipt and Refund | No | Yes |
There are 5 main differences between an invoice and a pro-forma invoice:
Whereas an invoice is a legal commercial document that is mandatory for all trade transactions, a pro-forma invoice is considered an optional formality provided as a courtesy to facilitate the purchasing process or for export/import customs purposes.
A pro-forma invoice is a draft sales proposal document without legal validity–similar to a quotation–that enables a buyer and seller to negotiate and agree the terms of sale before entering into a legally binding contract, when the pro-forma is converted into a final trade invoice.
Since there is no obligation or expectation attached to a pro-forma, a customer can accept, negotiate or refuse the transaction without any consequences.
A pro-forma invoice differs from a final invoice in that it applies to sales that are yet to be completed:
Unlike a final invoice, a pro-forma invoice is subject to change and does not legally bind either party in a transaction. Hence, a proforma invoice does not create an obligation for a seller to deliver the goods and services listed within the document and for a buyer to make a payment.
Consequently, the vendor should not record a pro-forma invoice as Accounts Receivable, and the buyer should not record it as Accounts Payable.
For the same reason, proforma invoices are not eligible for receipt and reclaim of sales tax, like VAT or GST, and should contain a disclaimer like “This is not a tax invoice” or “Draft tax invoice”.
When it comes to formatting, a pro-forma invoice typically includes similar information to a standard invoice, with two differences:
1. Each pro-forma invoice must be labelled as a “Proforma Invoice”–as opposed to an “Invoice” only–to make it clear that it is not a legally-binding document.
2. Also, pro-formas should not use standard invoice numbers, but instead have their own separate proforma sequence numbering system.
| Proforma Invoice vs. Quotation: 4 Differences | ||
|---|---|---|
| Difference | Quote | Pro-forma Invoice |
| Commitment | Interest | Intent |
| Formality | Less formal | More formal |
| Format | Letter memo | Draft invoice |
| Information | Less detailed | More detailed |
Although quotations and proforma invoices can be used interchangeably because they are similar in purpose, format and legal validity–they are not exactly the same. Here are 5 similarities and differences for you to consider:
Three similarities between a quotation and a proforma invoice:
Two differences between a quotation and a proforma invoice:
| Proforma Invoice vs. Purchase Order: 4 Differences | ||
|---|---|---|
| Difference | Pro-forma Invoice | Purchase Order |
| Issuer | Vendor - seller | Customer - buyer |
| Purpose | Inform prospective customer, create sale and agree its terms | Create legally binding purchase contract |
| Timing | Before purchase order and/or final invoice | After quotation and/or proforma invoice |
| Legally binding agreement | No obligation or commitment | Yes, once accepted by seller |
This is a summary of all the key differences between a quotation, a proforma invoice and a final commercial tax invoice >>>
| 8 Differences Between Quote | Proforma | Invoice | |||
|---|---|---|---|
| Difference | Quotation | Proforma Invoice | Final Invoice |
| Also known as | Quote | Pro forma, pro-forma, proforma | Commercial / tax / standard / final invoice |
| 1. Mandatory | No | No | Yes |
| 2. Negotiable | Yes | Yes | No |
| 3. Format | Informal proposal letter | Semi-formal quote in an invoice format | Formal commercial document |
| 4. Commitment | Interest to buy | Committed intent to buy and sell | Legally binding agreement to buy and sell |
| 5. Purpose | Create sale | Negotiate, agree and declare terms of a sale | Contractual instrument for tax, accounting, customs and other official purposes |
| 6. Timing | Initial response to prospective customers’ enquiries | Good-faith proposal issued prior to formal billing | Confirmation of a finalized sale and request for payment |
| 7. Accounting | No | No | Yes, entered into buyer’s Accounts Payable and seller’s Accounts Receivable |
| 8. Tax | No | Includes tax for information purposes only, with a disclaimer “This is not a tax invoice” or “Draft tax invoice” | Used to receive and reclaim sales tax and other relevant taxes |
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