What Is a Proforma Invoice and When Should You Use One?
Navigate early business transactions with clarity. Learn how a key preliminary document sets the stage for successful commercial agreements.
Navigate early business transactions with clarity. Learn how a key preliminary document sets the stage for successful commercial agreements.
A proforma invoice serves as a preliminary document in business transactions, offering an estimated bill of sale. It outlines the seller’s commitment to provide specific goods or services under agreed-upon terms, setting expectations before a transaction is finalized. This document helps both parties understand the scope and cost of an upcoming sale.
A proforma invoice is a preliminary, non-binding document that a seller issues to a buyer before the actual sale occurs. Its purpose is to state a commitment to sell goods or services at a specified price, providing an estimate of the final transaction. This document is not a final invoice and does not demand immediate payment. Instead, it informs the buyer about the goods or services they intend to purchase, including estimated costs.
The proforma invoice is not used for accounting purposes by the seller; it does not create an accounts receivable entry or a tax liability. It serves as a declaration for various purposes, such as obtaining internal company approvals for a purchase or facilitating customs procedures for international shipments. For instance, a buyer might use it to secure financing or an import license before committing to the purchase. The document reflects a good-faith estimate of the costs involved, including potential shipping and handling fees.
It represents a seller’s offer to sell specific goods or services at a predetermined price and terms. This offer helps the buyer plan for the transaction and understand the financial commitment. Once the buyer agrees to the terms, it can lead to a more formal agreement or a final commercial invoice.
A proforma invoice includes several specific details to accurately represent the transaction. It begins with the seller’s and buyer’s complete contact information, including names, addresses, and any relevant identification numbers. A unique invoice number and the date of issuance are also present. The document clearly states that it is a “Proforma Invoice” to avoid confusion with a final commercial invoice.
The proforma invoice details the goods or services being offered. This includes a precise description of each item, the quantity, and the agreed-upon unit price. The total price for all items is calculated, and the currency of the transaction is explicitly stated. Estimated shipping costs, insurance, and any applicable taxes or duties are also often included to provide a comprehensive cost estimate.
The invoice also outlines delivery terms, which might reference Incoterms (International Commercial Terms) like “FOB” (Free On Board) or “CIF” (Cost, Insurance, and Freight), to clarify shipping responsibilities and costs. A validity period for the quote is usually specified, indicating how long the stated prices and terms remain active. Payment terms, such as “prepayment required” or “net 30 days,” may also be noted, even though payment is not immediately due.
Proforma invoices are frequently used in international trade to facilitate customs declarations and secure import permits. Before goods cross borders, the buyer often needs a detailed document to present to customs authorities. This document helps estimate duties and taxes, ensuring compliance with import regulations and assisting in obtaining necessary licenses or permits for specific goods.
Another common scenario involves requests for prepayment before goods are shipped or services are rendered. A seller might issue a proforma invoice to inform the buyer of the exact amount due before production begins or items are dispatched. This allows the buyer to process the payment internally or through their bank, ensuring funds are transferred prior to the seller incurring costs or shipping goods. The document acts as a formal request for this upfront payment.
Companies also use proforma invoices for internal approval processes for purchases. Before a department commits to a significant expenditure, they might require a proforma invoice from the supplier to present to their finance or procurement department. This helps in budgeting and gaining the necessary authorization for the expenditure. For project-based work or services, a proforma invoice can serve as a detailed quote, outlining the scope, deliverables, and estimated costs before a formal contract or service agreement is finalized.
A proforma invoice differs significantly from a commercial invoice, despite both detailing goods and prices. A commercial invoice is a final, legally binding demand for payment, issued after goods or services have been delivered or shipped. It is used for accounting purposes by the seller, creating an accounts receivable entry, and serves as a primary document for calculating sales tax and income. In contrast, a proforma invoice is non-binding, issued before the transaction is complete, and does not create an immediate financial obligation or an accounting entry.
The distinction from a purchase order (PO) is also clear, as a PO originates from the buyer. A purchase order represents a buyer’s formal commitment to purchase specific goods or services from a seller under defined terms. It is the buyer’s official instruction to the seller to supply items. Conversely, a proforma invoice is a seller’s offer, outlining their intent to sell, and is issued before the buyer’s formal commitment via a PO or other agreement.
While a proforma invoice can function similarly to a standard quote, it often includes more specific details, particularly those required for international trade or prepayment requests. A general quote might simply list prices and descriptions. A proforma invoice, however, frequently includes estimated shipping costs, delivery terms, and the validity period, making it a more comprehensive document.