Understanding Proforma Invoice

A proforma invoice is like a preview of a bill for goods or services. It’s not the final invoice that asks for payment but rather an estimate. This document outlines what will be sold and at what price, along with other important details like delivery dates and any special terms. 

Businesses use proforma invoices to give customers an idea of what to expect before the actual sale happens. It helps both buyers and sellers prepare for the transaction and understand the costs involved. Understanding how proforma invoices work can make buying and selling smoother and more transparent.

What is a Proforma Invoice?

A proforma invoice is an important document used in business transactions. It is like a detailed price quote that includes the terms of the sale, but it is not a bill asking for payment. Here’s what you need to know:

• Purpose: A proforma invoice shows the price and terms of sale for a specific transaction. Buyers use it to understand costs before the final sale.
• Function: It provides a quotation, showing the details of items, transport fees, delivery time, and shipping weight. It is sent to the buyer before the goods are delivered or shipped.
• Not a Demand for Payment: Since it is sent before the delivery, it should not be recorded as money owed by the buyer.
• Differences from Final Invoice: Unlike the final invoice, a proforma invoice does not have an invoice number and it does not demand payment. It outlines the details of the purchase and the expected delivery.
• Usage: A proforma invoice is issued when the sale is finalized but before the payment is due.

Features of Proforma Invoice

Here are some of the main features of Proforma Invoice: 

1. Commitment to Price

The proforma invoice assures the buyer that the seller will deliver goods or services at the agreed-upon price. It serves as a commitment from the seller to honor the quoted price without any changes.

2. Payment and Delivery Terms

This section outlines important details regarding payment and delivery:

• Currency: Specifies the currency in which payment will be made (e.g., USD, rupees).
• Credit Period: Indicates the time period within which the buyer is expected to make the payment.
• Advance Payment: Specifies if any upfront payment is required before delivery.
• Additional Services: Lists any extra services provided by the seller (like installation or maintenance) and their associated costs.
• Additional Costs: Covers expenses related to documentation, legal work, or inspections, which may be borne by either the exporter or importer.
• Validity Period: Specifies the duration during which the terms and prices quoted in the proforma invoice remain valid.

3. Mode of Shipment

This section details how the goods or services will be transported:

• Specifies the method of shipment, which could include land, air, sea, or a combination of these.
• Provides clarity on the logistics chain, ensuring both parties understand the route and transport modes involved.
• For example, goods might be transported by road to a port and then shipped by sea to the final destination.

4. Expected Delivery Timeline

Provides an estimated timeframe for the delivery of the products or completion of the services:

• States the anticipated time required for the goods to reach the buyer after the order is placed and payment terms are agreed upon.
• Helps the buyer plan for receipt of the goods or services, aligning expectations with operational timelines and requirements.

Requirements Of Proforma Invoice

A standard proforma invoice should have the following details and specifications:

• Address of the seller/supplier
• Address of the purchaser/prospective buyer
• A unique invoice number
• Date of issue of the proforma invoice
• Details of the goods (weight, dimensions, total number of units)
• Details of the services (itemized charges/fees)
• Bill of Lading
• Period of validity of the proforma invoice
• Agreed/proposed terms of sale
• Agreed/proposed terms of payment
• Certifications required as per the law
• Permissions required as per the law
• Estimated/proposed timeline of delivery
• Mode of shipment
• Signature by an authorized person from the seller’s/supplier’s company

Things to Keep in Mind While Creating a Proforma Invoice

When creating a proforma invoice, remember these key points:

Include Essential Details: Make sure to include all necessary information mentioned earlier. Even though a proforma template may resemble a final invoice, clearly label it as ‘PROFORMA INVOICE’ to avoid any confusion.

Legal Clarity: For export purposes, a proforma invoice is an estimate, not the final invoice. It’s crucial to clearly state this at the top to maintain legal clarity.

Follow Industry Standards: It’s wise to adhere to industry-specific norms when preparing a proforma invoice. This ensures that all commercial details like dates, tax rates, estimated prices, and delivery schedules are clearly stated and understood.

Simplicity is Key: Avoid cluttering the proforma invoice with unnecessary artwork or logos. A clear, easy-to-read layout helps in maintaining professionalism and clarity in business transactions.

Difference between Proforma Invoice and Tax Invoice

Here’s the difference between Proforma Invoice and Tax Invoice: 

Proforma Invoice

A proforma invoice is like a price quote or an estimate for the buyer. It’s prepared by the seller and shows what items are being sold, along with costs for shipping and delivery. It’s not a demand for payment but helps both parties keep a record of the transaction details.

Tax Invoice

A tax invoice is issued after the buyer has purchased goods. It tells the buyer that payment is due. This invoice is a legal document that confirms the sale agreement between the buyer and the seller.

Also Read: The Ultimate Guide on What is Invoice Discounting

Conclusion

In business, a proforma invoice plays a key role by providing a detailed preview of a transaction’s terms and costs before goods or services are delivered. It helps buyers plan and budget while ensuring sellers commit to agreed-upon prices and conditions. Unlike final invoices, proforma invoices are estimates and don’t demand payment. They are crucial for international trade, outlining shipment details and payment terms clearly. Following industry standards and keeping the invoice simple ensures clarity and legal compliance. By understanding how proforma invoices work, businesses can navigate transactions smoothly, fostering trust and efficiency in commercial dealings

.Also Read: What’s the Difference Between Invoice Discounting and Invoice Factoring?