Understanding pro forma invoices and when to use them

What is the meaning of pro forma and when are pro forma invoices used?

What is a pro forma invoice?

A pro forma invoice is sent to a buyer in advance of a shipment or delivery of goods or services. A pro forma invoice usually includes an accurate sale price as well as a description of the purchased items, and important information relating to shipping costs.

Pro forma meaning

Pro forma is a way of calculating financial results based on presumptions or projections. It is a Latin term that means “for the sake of form” or “as a matter of form”.

Why are pro forma invoices used and when are they sent?

Pro forma invoices are used to give customers, who are placing an order with a company, an idea of how much the products and services are likely to cost them. It provides a provisional bill of sales that is sent after a customer has committed to buying the goods or services but hasn’t yet finalised the details of the sale or received the goods.

The invoice will describe the goods or services being sold and the total amount payable plus any taxes or fees that may be incurred to avoid subjecting the customer to any unexpected charges. The customer will agree to the price on the pro forma invoice first and then receive the goods.

Pro forma invoices are used to try and ensure a smooth sales process. Everything is agreed up front and in good faith, the customer is clear on what they are receiving and for what cost and the seller knows that the client is happy with the deal. This should hopefully prevent any discord with the customer once the goods are received and the final invoice is sent.

Understanding a pro forma invoice

A pro forma invoice is not a request for payment unlike a final invoice and it isn’t legally binding. The pro forma invoice will, like an invoice, describe the items and number of units being purchased plus any associated costs, including customs charges. If the business is international then details of applicable taxes, currency exchange and shipping costs are also included. The details and costs included in a pro forma invoice can be subject to negotiation or change from both seller and buyer and many updated pro forma’s may be sent before the customer is happy with the details. There should be no unexpected changes to the customer from the final pro forma as its objective is to give the client the most precise estimate possible.

As it isn’t a final invoice it doesn’t require a unique sequential number and does not get included in accounting records as the customer has at that point not agreed to the terms so it has no fiscal value.

What is the main difference between an invoice and a pro forma invoice?

While a traditional information contains a great deal of information including things like the buyer’s and seller’s details, goods or services provided and payment terms, a pro forma invoice requires only general information to allow customs to calculate duties from a quick examination of the products included.

What information should you include on a pro forma invoice?

A precise sale price is included on most pro forma invoices, as well as an estimate of any fees related with shipping costs or taxes. Pro forma invoices can often be subject to change, however they are generally regarded as estimates that help to avoid the buyer paying unexpected, large charges further down the line.

Advantages of a pro forma invoice:

  • Helps to ensure a smooth sales process
  • Includes all the required relevant information that the customer needs
  • Not a legal binding agreement so the details can be changed or negotiated
  • Provides an understanding of the commitment to both buyer and seller
  • Serves as a useful check for errors and misunderstandings
  • Can be used as a stand in if all the details for a commercial invoice are not available
  • Can help with a company’s internal purchase process which often require a pro forma invoice

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