Proforma Invoice

Most of the business Owners send a Proforma Invoice to the customer indicating how much money they owe them. This is done before the actual commercial document is sent.

Steps followed is as below.

1. Make a Sales Order / Order Acknowledgement
2. Make a Proforma invoice
3. Once Customer agrees to the Profoma Invoice and Pays the MONEY,
4. We make the FINAL INVOICE / Commercial invoice and Shipment happens.

Most of the cases, Seller sends the Proforma Invoice (PI) and expects customer to PAY the money. If PI is OK, he converts the Proforma Invoice into an Actual tax Invoice /Commercial invoice / Sales Invoices. These are needed for accounting purposes.

Note – In a special case a Customer is also a Supplier, where we have to money for his supplies then we consider our accounts payable amount and net amount is demanded from customer. So our Sales Invoices contains net amount after deducting what we have to pay this customer.

What is Proforma Invoice?

A proforma invoice is a preliminary or draft invoice issued by a seller to a buyer before the actual sale of goods or services takes place. It serves as an estimation of the final invoice and provides detailed information about the products or services to be provided, along with their associated costs. While it is not a legally binding document, a proforma invoice acts as a crucial communication tool in international trade and business transactions.

It mainly contains Items sold, Quantity, Sale Price, terms of sale, Terms of payment, shipping address, Shipping details, payment method and other transaction details that could help customer to pay the money. For international transactions, we seek information of letter of credit or Bank guarantees etc.

Enterprise Resource Planning Software or an Invoicing Software has Proforma invoice template and that can used for each customer needs. Once the PI is paid, it can be converted automatically to a Sales Invoices / official invoices that can be shared with Tax Authorities.

Why You Need a Pro-Forma Invoice?

A Pro-Forma Invoice offers several benefits that can significantly enhance your business transactions:

a. Clarity and Transparency: It provides clear and transparent details about the products or services, their quantities, prices, and any additional charges, helping to avoid misunderstandings between the seller and the buyer.

b. Precursor to Final Invoice: It acts as a precursor to the final invoice, allowing the buyer to review the terms and conditions and make necessary adjustments before the actual transaction.

c. Facilitates Import and Export: In international trade, customs authorities may require a Pro-Forma Invoice to assess duties and taxes before the goods are shipped.

d. Budget Planning: Buyers can use the Pro-Forma Invoice to plan and allocate budgets effectively for upcoming purchases.

e. Confirmation of Order: Sellers can use the Pro-Forma Invoice to confirm the buyer’s order and ensure mutual agreement on the terms of the transaction.

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Examples of Proforma Invoice

Let’s take a look at two examples of proforma invoices:

Example 1: An electronics retailer sends a proforma invoice to a customer interested in purchasing a laptop. The proforma invoice includes details such as the laptop’s model, specifications, price, applicable taxes, and shipping charges. The customer reviews the proforma invoice, confirms the order, and proceeds with the payment.

Example 2: A clothing manufacturer provides a proforma invoice to a wholesaler interested in placing a bulk order for t-shirts. The proforma invoice contains information about the quantity of t-shirts, their sizes, unit price, and any applicable discounts. The wholesaler uses the proforma invoice to negotiate the terms and conditions before finalizing the order.

Is Pro-Forma Invoice Legally Applicable?

A proforma invoice is not a legally binding document like a commercial invoice. It serves as a formal offer or quotation and does not replace the actual invoice that records the completed sale. However, it is essential to maintain accuracy and consistency between the proforma invoice and the final invoice to avoid discrepancies and ensure a smooth transaction process.

What’s the Difference Between Proforma Invoice vs Invoice?

The primary difference between a proforma invoice and a regular invoice lies in their purpose and timing:

• Proforma Invoice: It is issued before the actual sale, providing a preview of the products or services and their costs. It is used for budget planning, customs declarations, and confirming the order.
• Invoice: An invoice is generated after the sale is completed, detailing the actual products or services delivered and the final amount to be paid. It serves as a formal request for payment and is a legally binding document.

Advantages of Pro-Forma Invoice:

The advantages of using Pro-Forma Invoice in business include:

Enhances Communication

It facilitates clear communication between the seller and the buyer regarding the terms of the transaction.

Risk Mitigation

It helps minimize the risk of payment disputes and misunderstandings by providing detailed information upfront.

Streamlines International Trade

Proforma invoices are especially valuable in international trade to comply with customs requirements and facilitate smooth shipping processes.

Builds Trust

Providing proforma invoices demonstrates professionalism and builds trust with clients, enhancing your business reputation.

Facilitates Financial Planning

It enables buyers to plan their budgets and secure necessary funds for the purchase.

ACTouch Cloud ERP helps to Make a Proforma Invoice and then convert to an Invoice. The traceability and tracking of Accounts Receivable is done post Invoice is sent to customer. It’s a 100% integrated ERP for you.

FAQ on Proforma Invoice

Is a proforma invoice legally binding?

No, a proforma invoice is not legally binding. It serves as a preliminary offer and does not replace the actual invoice for completed sales.

Can I modify a proforma invoice?

Yes, a proforma invoice can be modified before the actual transaction. It is a negotiable document that can be adjusted based on mutual agreement between the seller and the buyer.

Can I use a proforma invoice for customs clearance?

Yes, a proforma invoice is often used for customs clearance to assess duties and taxes before the actual shipment of goods in international trade.

Define Proforma Invoice Meaning?

A Proforma Invoice is a preliminary document provided by a seller to a buyer before the actual sale of goods or services takes place. It serves as a detailed quotation or estimate of the costs involved in a potential transaction. This document outlines the terms of the sale, including the description of the goods or services, their quantities, prices, and any other relevant information.

PIs are often used in international trade, especially when dealing with customs and import/export regulations. They provide important information to both parties involved in the transaction and can be used for various purposes, such as obtaining financing, obtaining import/export permits, and confirming the terms of the agreement.

A PI is a valuable tool that enhances communication, reduces payment disputes, and facilitates smooth business transactions. By providing detailed cost estimates and terms upfront, it enables both sellers and buyers to make informed decisions and plan their transactions effectively. Although not legally binding, a proforma invoice plays a crucial role in the sales process, especially in international trade, and contributes to building strong business relationships based on trust and transparency.