The first and most important thing to tell you about proforma invoices is that they’re not actually invoices at all. Well, not legally speaking, anyway.
A proforma invoice is a more formalised way of saying ‘here are the things/services I’m selling you, and this is what I’m expecting them to cost, but this might change a bit, and we can still negotiate on it’. It sits somewhere between a quote and an invoice; typically more official and detailed than a quote but, unlike with an invoice, a proforma invoice isn’t requesting payment (and can’t legally be used to do so).
Proforma invoice vs invoice vs quotation
Let’s look at exactly how a proforma invoice differs from a regular invoice, or a quote:
|Quote (Quotation)||Proforma invoice||Invoice|
|Purpose||To give a rough indication of the cost of work or products at the very beginning of proceedings.||To give a more detailed breakdown of the costs involved. Usually issued just before the order is made.||To give the full breakdown of work/products delivered, and request payment. Invoices can be used for accounting purposes (unlike proforma invoices).|
|Issued||Early on in proceedings||Just before orders are made||Once work has been completed or products delivered|
|Format||No formal format needed||Similar to an invoice, but without an invoice number. Should clearly be labelled as ‘Proforma invoice’ to avoid confusion.||Should include details such as contact details for both you and the recipient, an itemised list of goods/services, and an invoice number (more detailed breakdown of this below).|
A quote, proforma invoice and invoice aren’t all required for every transaction. Often a quote and an invoice will be enough.
When to use a proforma invoice
So if that’s the case, why do proforma invoices exist? And when should you use one?
Proforma invoices work well for situations in which the final payment amount for the goods or services still may change.
When shipping abroad (or there’s a chance of things being damaged in transit)
Let’s say you’re shipping 500 ceramic bowls overseas. You’ve packed them carefully, but what’s the likelihood of all 500 arriving unharmed?
You need either a proforma invoice or an invoice to ship products abroad. This shows the customs department what is in your shipment, and how much it’s worth. You might think it makes sense to just go straight ahead and issue the invoice, but in the scenario above, you’d then have to raise a credit for any bowls that didn’t survive the trip. It’s less admin to start with a proforma invoice, then adjust and send this as a final invoice once the order has been received.
When you can’t fully predict the full cost yet
In the service sector, a proforma invoice is good when you know unforeseen circumstances could arise. It’s a way of formalising your initial quote, and basically saying ‘this is exactly what you’re paying for’ breaking the tasks and materials out specifically. If anything unexpected crops up, it’s easy to refer back to this comprehensive proforma invoice and explain why you need to charge more.
Creating a proforma invoice
A proforma invoice normally contains everything you’d expect on a regular invoice, except for an invoice number. It also must be clearly labelled as ‘Proforma’.
It’s normal/expected for a proforma invoice to include:
- The date of issue (when you’re creating the invoice)
- Contact details for both you and the recipient person or business
- List of everything sold (with description)
- Price and quantity of each item
- Any tax rates (e.g. VAT) and the amount for each
- The total payment amount
- Your payment details
You can either raise a proforma invoice using your accounting software, or by using a template and creating your own in a Google doc.
Proforma invoices are a handy way for businesses to avoid extra admin, or difficult conversations. They help get everyone on the same page before any money is exchanged.
Creoate suppliers wishing to ship abroad will need to be able to create a proforma invoice to go with their shipments. Got any questions? Check out the FAQs below, or drop us a comment if we haven’t covered it.
Unlike a regular invoice, a proforma invoice cannot be used for accounting purposes, or to enforce payment. Otherwise, it looks much like a regular invoice — it just doesn’t have the invoice number, and should be clearly labelled as ‘proforma’.
No, you should send a regular invoice (including an invoice number), and payment should be made on this.
A proforma invoice should be sent with the goods so they arrive together. If you’re issuing a proforma invoice for a service, it’s advisable to do this just before you start work, once you’ve already verbally agreed things.
We do not believe a proforma invoice is legally binding (in the sense that it cannot be used for accounting purposes, or to legally enforce payment). However it is always worth getting professional legal advice if you’re unsure.
It’s not necessary to formally cancel a proforma invoice. If you don’t go forward with the transaction, it can simply be thrown away.
No, a proforma invoice should not have a number. This is one of the important differences between a proforma invoice and a regular invoice (the other being that a proforma invoice should be clearly labelled ‘proforma’).
You shouldn’t pay a proforma invoice. Instead, you should wait for (or request) a regular invoice with an invoice number and pay this version instead.
It is best practice for the recipient of the goods or services to sign the proforma invoice and return it to the sender.