What is a Pro Forma Invoice and When to Use It

What is a Pro Forma Invoice?

In business, a pro forma invoice, also referred to as a proforma invoice, is a preliminary bill of sale (a document detailing a transaction) sent from a seller to a buyer before a shipment or delivery of goods arrives.

The information found on a pro forma invoice can vary, but it will generally include the following:

  • Invoice number

  • Date of issue of the pro forma invoice

  • A description of the goods purchased

  • Their purchase price

  • Shipping destination and timeline

  • Shipping cost

  • Any other associated costs

  • Due date or payment terms, for example, payment will be due 30 days from receipt

While pro forma invoices tend to follow the same general template, there are no standardized or legally regulated guidelines that dictate exactly how a pro forma invoice should be formatted, presented, or written.

The phrase pro forma comes from a Latin phrase meaning 'for the sake of form,' and they're often used in international transactions to help shipments pass smoothly through customs and ensure successful transactions without any major hangups. Pro forma invoices are as important for customs agents as they are for buyers and sellers, as they allow customs to determine what duty fees are required based on the goods included in a shipment.

How does a Pro Forma Invoice Work?

The business world is filled with various types of documents exchanged between buyers and sellers relating to a transaction. They occur at various stages of the transaction and differ in how legally binding they are.

For example, a price quote is not a binding agreement but simply a way for a seller to detail exactly how much the requested goods or services would cost if the transaction were to be completed. Similarly, the precise terms of a sale are not set in stone with a pro forma invoice either, but it is a more formal document and represents a proposed agreement between the buyer and the seller. It is an estimate created before the sale is complete and final.

Pro forma invoices are used in every industry in a wide range of transactions, and it's important to note that while a pro forma invoice is designed to be a precise detailing of costs of the sale, it's not an official request for payment.

What is the Purpose of a Pro Forma Invoice?

One of the primary purposes of a pro forma invoice is to streamline and smooth out the sales process between buyers and sellers. When tools like a pro forma invoice are used to nail down costs and details associated with a transaction, it prevents additional discussions or disagreements from taking place after a sale has been completed.

Pro forma invoices give buyers a precise, often itemized sale price. They tend to include commissions, fees, taxes, and shipping costs, providing a complete picture of the full cost of the transaction.

While pro forma invoices are subject to change, they're meant to provide as accurate an estimate as possible for buyers so that significant unexpected charges can't derail a transaction or cause bad faith between the involved parties.

Pro forma invoices can also be used when a full commercial invoice isn't possible because not all details are yet available. It's a good faith effort to communicate the details from a buyer to a seller before the transaction is made official.

Pro forma invoices may also be used internally to help with the purchase approval process between departments.

What are the Different Types of Invoices?

There are a number of different types of invoices. They include a sales invoice or final invoice, commercial invoice, credit memo, preliminary invoice, and pro forma invoices.

What is the Difference Between an Invoice and a Pro Forma Invoice?

A pro forma invoice comes after a quote or estimate but before the final invoice.

A final invoice or sales invoice, is sent to a buyer confirming that a sale has occurred to request payment. A pro forma invoice, on the other hand, confirms that a sale will happen in the near future according to the agreed terms. The pro forma invoice lists the order details so that the buyer can review the final costs and verify that the terms of the sale match their understanding.

A sales invoice should represent the final total amount due on a sale. Assuming that the invoice is in line with the sales agreement, the amount due is legally binding on the buyer, and the seller can also properly count the sale for accounting purposes. The amount on a pro forma invoice is not legally binding because it is still just an estimate, and it is the invoice that the seller's accounting team would refer to for the accounts receivable process.

What is the Difference Between a Commercial Invoice and a Pro Forma Invoice?

A commercial invoice may be used interchangeably with a final invoice in some contexts. A commercial invoice is an important document for international shipping, as it is used for export and important clearance. The seller would send a commercial invoice along with the international shipment, allowing customs officials to identify what is in the shipment and to calculate any taxes and duties that apply.

What is a Credit Memo?

A credit memo is a refund on a final invoice. The buyer may have discovered damaged items after the final invoice was sent. There may also have been a clerical error in the final invoice. A credit memo is an amendment to an invoice that is still intended to be final.

You would not use a credit memo with a pro forma invoice because pro forma invoices are subject to change. If you need to make changes to a pro forma invoice, you can just issue an updated one instead.

What is a Preliminary Invoice?

Pro forma invoices are sometimes referred to as preliminary invoices, but there can be other types of preliminary invoices. A preliminary invoice is any invoice sent before a final invoice is posted. Preliminary invoices are designed to inform and seek approval for details before the official invoice is sent.

For example, a seller may not send a final invoice upon delivery. One situation where this may happen is if the buyer has time to reject part of the delivery. Another situation is when the payment terms between the buyer and seller call for the seller to invoice for all shipments on a monthly basis. The seller may send a preliminary invoice after delivery that represents the charges that will be due based on what was included in that shipment. This preliminary invoice is not a pro forma invoice because the items have already been delivered, and it is not a final invoice because the seller is not yet formally charging the buyer.

How is a Pro Forma Invoice Different from a Purchase Order?

​A purchase order is the opposite of a pro forma invoice. A buyer sends a purchase order to formally request goods or services. The buyer will usually list the details of the sale, such as the price. Usually, the buyer will already have the seller's terms and complete the purchase order to match. However, like a pro forma invoice, either party might make changes to a purchase order before shipment.

When does the Seller Issue a Pro Forma Invoice?

A seller generally sends a pro forma invoice shortly before shipping. This gives the buyer time to respond if there are any issues.

Companies generally issue pro forma issues when there is some uncertainty between the estimate or quote and final charges. This might include the following situations.

  • Quantities not determined in advance

  • Pricing varies based on market conditions

  • Applicable taxes, such as VAT (value-added tax), weren't previously calculated

  • Shipping charges that vary based on final weight or fluctuating shipper prices

Although the pro forma invoice is intended to confirm the details of the order, the final charges are subject to change depending on circumstances. It's a good practice to note this on the pro forma invoice.

Should I Pay a Pro Forma Invoice?

The pro forma invoice is not a formal request for payment. You should review the seller's payment terms for when you need to pay, but this will generally be after you receive the final invoice. The buyer should not include a pro forma invoice in accounts payable, and the seller should not include it in accounts receivable.

You may wish to go ahead and pay the pro forma invoice if you believe the final amount won't change. However, you may be taking the risk that the goods or services don't get fulfilled as agreed and you may have difficulty getting reimbursed for the money you already paid. Therefore, it's best practice to use pro forma invoice as a reference and not regard it as a sales invoice.

Why Use Pro Forma Invoices?

The main reason for using a pro forma invoice is to help streamline and smooth out the sales process. It's a way for a seller to communicate the price of goods or services and for the buyer to agree to the terms of the pro forma invoice before making the transaction official.

Pro forma invoices can serve as a sort of protection for sellers. It insulates sellers from the event of delivering goods to a buyer and requesting payment only to have a buyer claim that they didn't agree to the terms of the sale or are unhappy with the transaction. This can leave sellers in the tough position of having delivered the goods or services but not receive payment. Pro forma invoices can help avoid this, providing the chance for both parties to agree to the details of the transaction before the delivery of goods or services.

How does BILL Help with Invoice Processing?

BILL provides buyers and sellers a faster and easier way to process invoices. If you're a seller, convert your pro forma invoice to a final invoice in your accounting software, and BILL will help streamline and manage the accounts receivable process. Buyers can use BILL's accounts payable product to review and approve the invoices they receive and then pay them according to the payment terms. To learn more about how it works, sign up for a risk-free trial.

The content found here is for informational purposes only, and not for the purpose of providing advice, including but not limited to, financial, legal, or tax advice. Any opinion found here does not necessarily represent those of BILL.

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