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What is a Proforma Invoice?
A proforma invoice is a preliminary bill sent to a buyer before a sale to communicate expected cost of goods or services. It acts as a placeholder before the final sale is confirmed.
It helps ensure both parties are on the same page regarding pricing, quantities, and other key details before any money or goods exchange hands. Once both parties agree on the terms of the proforma invoice, the seller creates a sales invoice and begins to work on delivering the goods or services.
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Legality of Proforma Invoice
A proforma invoice has a valuable purpose in business transactions, but its legal weight is quite limited. Here’s a breakdown of its legal standing:
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Not a Binding Contract: Unlike a final invoice, a proforma invoice isn’t legally binding. It doesn’t obligate the buyer to make a purchase or the seller to fulfill the order at the listed price.
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Estimate, Not a Final Bill: It functions as a detailed estimate outlining the potential cost of goods or services. Both parties can use this information to discuss and finalize the terms before a formal agreement is reached.
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Use for Customs Clearance: Proforma invoices play a crucial role in facilitating international trade. Customs officials often require them to assess duties and taxes on imported goods. While not a binding contract, it helps with smooth clearance procedures.
Proforma Invoice Usecase
Proforma invoices provide clear and detailed breakdown of the pricing, features and delivery dates before the purchase. This ensures that the buyer and seller are on the same page about every single detail regarding the purchase.
Let’s take the example of Crews Ltd, a company offering corporate catering services. ABC Ltd approaches Crews Ltd with the requirement of 2,000 lunches and coffees every day for a month.
Crews Ltd proceeds to deliver the lunches and coffees without providing ABC Ltd with a proforma invoice. At the end of the month, Crews Ltd raises a final invoice on ABC Ltd. This final invoice shows additional service charges, extremely tight deadlines, and unreasonal payment terms, leading to disagreements between Crews Ltd and ABC Ltd.
If Crews Ltd had provided ABC Ltd with a proforma invoice, ABC Ltd would have been able to set clear expectations regarding pricing, service inclusions, payment terms, and any additional fees, ensuring a smooth and transparent experience for both parties.
Components of Proforma Invoice
A profoma invoice looks very similar to a final bill, with a few additional details.
Identification:
- Document Title: Clearly labeled as “Proforma Invoice”
- Unique Invoice Number: For easy reference and tracking
- Date of Issue: Indicates when the proforma invoice was created
- Possible Expiration Date (Optional): Specifies how long the pricing and terms remain valid
Parties Involved:
- Seller Information: Seller’s company name, address, and contact details
- Buyer Information: Buyer’s company name, address, and contact details (including billing address if different)
- Buyer’s Reference (Optional): A reference number provided by the buyer for their own tracking purposes
Transaction Details:
- Product or Service Description: A clear description of the goods or services offered
- Quantity: The specific amount of goods or services being offered
Optional Pricing Details:
- Unit Price: The price per unit if applicable (e.g., per item, per hour)
- Total Price: The overall cost for the entire transaction
Additional Costs (if applicable):
- Taxes: Any applicable taxes that will be added to the final invoice
- Discounts: Any early payment discounts or volume discounts offered
- Shipping or Delivery Fees: Costs associated with getting the goods or services to the buyer
- Service Charges: Costs associated with additional services beyond the core product or service
Payment Terms:
- Payment Method(s): Preferred payment methods (e.g., bank transfer, credit card)
- Due Date: The timeframe for payment (e.g., net 30 days from the invoice date)
Delivery Information (if applicable):
- Estimated Delivery Date or Schedule: When the buyer can expect to receive the goods or services
- Delivery Location: The designated location where the goods or services will be delivered
Additional Notes (Optional):
- Any other relevant information about the transaction, such as validity of the quote or a disclaimer stating it’s not a final invoice
Sample Proforma Invoice
Here’s a free, downloadable proforma invoice with automatic calculations and more. With solutions like RazorpayX Source to Pay, you can automate the entire procurement process and save time, money and resources.
Free editable proforma invoice
Proforma Invoice vs Final Invoice
| Feature | Proforma Invoice | Final Invoice |
|---|---|---|
| Purpose | Quote / Estimate | Bill for Completed Work |
| Legality | Not Binding | Legally Binding |
| Issued When | Before Sale Confirmed | After Sale Completed |
| Content | Estimated Costs Potential Terms Optional: Unit Price, Delivery Info |
Agreed-Upon Final Price Payment Terms (due date) Applicable Taxes |
| Use Cases | Securing Internal Approval Facilitating Trade Negotiating Sales Setting Expectations |
Requesting Payment |
Automating Invoice Management
How much time does your procurement process take? How many people spend precious time on tedious tasks like following up on approvals, data entry of vendor information, invoice management and more?
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FAQs
Who prepares proforma invoice?
Proforma invoices are typically prepared by sellers or businesses when quoting a potential customer on goods or services. They act as a preliminary estimate before a final agreement is reached.
Is proforma invoice a receipt?
No, a proforma invoice is not a receipt. It's more like a proposed bill outlining the expected cost. A receipt is issued after a sale is finalized and payment is received.
Why is proforma invoice needed?
Proforma invoices are essential for setting clear expectations upfront in a business transaction. They help avoid confusion by presenting estimated costs, quantities, and terms to both the seller and the buyer before any commitments are made.
How to make a proforma invoice?
You can create a proforma invoice using various methods. Many word processing programs and online tools offer invoice templates. The key is to include details like seller information, buyer information, product/service descriptions, quantities, estimated costs, payment terms, and any additional fees.
