In business, a pro forma invoice is a 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 differ from case to case, but generally they include a listing of the items purchased, their purchase price, and other details that are relevant to the transaction such as shipping information, charges relating to shipping, and more.
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.
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.
Pro forma invoices are as important to customs agents as they are to buyers and sellers, as they allow customs to determine what duty fees are required based on the goods included in a shipment.
The business world is filled with various types of documents exchanged between buyers and sellers relating to a transaction, and 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 to a buyer exactly how much the requested goods or services would cost if the transaction were to be completed. But a pro forma invoice is a more formal document and represents a binding agreement between the buyer and the seller, though the precise terms of the sale are not set in stone at that stage.
Pro forma invoices are used in every industry in a wide range of transactions. They may be sent before shipping agreed-upon goods or sent along with the shipped items.
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.
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 because all the specific terms have already been agreed to ahead of time.
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 without any hidden costs.
Pro forma invoices are subject to change, but 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 that are available 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 exactly is the difference between a standard invoice and a pro forma invoice?
An invoice is sent to a buyer confirming that a sale has occurred and serves as the first official request for payment. A pro forma invoice, on the other hand, is a detailed proposal similar to a quote that provides the details of the goods or services that will soon be delivered, and outlining the associated costs.
An invoice is issued after goods are services are rendered but before payment is made, whereas a pro forma invoice is rendered before the goods or services have officially been ordered or transacted.
An invoice is a legally binding request for goods or payment after goods or services have been provided, while a pro forma invoice is not a legally binding document and is mainly designed to provide information for the buyer.
Pro forma invoices are sometimes referred to as preliminary invoices, but are they one and the same?
A preliminary invoice is any invoice sent before an official invoice is actually posted. Preliminary invoices are designed to inform and seek approval for details before the official invoice is sent.
In this regard, a pro forma invoice is a type of preliminary invoice, though there are others as well.
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 receiving payment for it. Pro forma invoices can help avoid this, providing the chance for both parties to agree to the details of the transaction before delivery of goods or services are made.
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