In some ways, a pro forma invoice is very much like your typical commercial invoice — it lays out the details of a business transaction. However, there are other ways in which a pro forma invoice is very different from what most people think of as an invoice.
This article lays out what a pro forma invoice is, the general information it includes, and the role it plays in commercial transactions.
What is a pro forma invoice?
A pro forma invoice, or preliminary invoice, is an estimated bill of sale used to request payment before a product or service has been provided to a buyer. Typically, a pro forma invoice includes a description of the goods or service, the amount due, and other important details.
The words ‘pro forma’ come from a Latin phrase meaning 'for the sake of form.' Today, a pro forma invoice may also be referred to as a pro forma invoice.
Pro forma invoices are 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, allowing customs to determine what duty fees are required based on the goods included in a shipment.
Is a pro forma invoice legally binding?
While a pro forma invoice is intended to set forth the intended details of a transaction, it is not legally binding, nor is it an official request for payment. It is merely a good-faith effort to outline the goods that the buyer can expect to receive, the price they should expect to pay, and various shipping details as listed below.
Pro forma invoice template
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.
If you need a pro forma invoice template for your business, you can consider this pro forma invoice example:
How does a pro forma invoice work?
Transactions do not always require a pro forma invoice. A business might pay a monthly utility bill, for example, without any other documentation from the utility company beyond the bill itself.
However, when ordering goods from a supplier, especially overseas, a pro forma invoice may be used to lay out the intended details of the shipment. While not leglly binding, a pro forma invoice may help a buyer apply for an import license, for example, or it could help a buyer open a line of credit for the purchase.
In short, a pro forma invoice offers documentation of a shipment ahead of time whenever that information might be required.
Should I pay a pro forma invoice?
The pro forma invoice is not a formal request for payment. You should review the information included in a pro forma invoice for accuracy, but there is no need to send payment when a pro forma invoice is received.
The buyer should not include a pro forma invoice in accounts payable, and the seller should not include it in accounts receivable.
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 pro forma invoices are used to nail down costs and details associated with a transaction, it helps prevent additional discussions or disagreements from taking place after a sale has been completed.
Pro forma invoices may include commissions, fees, taxes, and shipping costs along with the expected price, providing a more complete picture of he transaction costs.
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 parties involved.
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.
Pro forma invoice vs. 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.
Pro forma invoice vs. 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 to confirm that a sale has occurred and to request payment. A pro forma invoice, on the other hand, suggests that a sale will happen in the near future according to the agreed terms. The pro forma invoice lists the order details so 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. It is the final invoice, or sales invoice, that the seller's accounting team would refer to for the accounts receivable process.
Pro forma invoice vs. commercial invoice
The term ‘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, for example. Or there may 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 not legally binding and are subject to change. If you need to make changes to a pro forma invoice, you can simply issue an updated one.
What is a preliminary invoice?
Pro forma invoices are sometimes referred to as ‘preliminary invoices,’ but there can be other types of preliminary invoices as well. A preliminary invoice is any invoice sent before a final invoice is posted.
For example, a seller may not send a final invoice immediately 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.
In these kinds of cases, 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.
Pro forma invoice vs. purchase order (PO)
How is a pro forma invoice different from a purchase order? A purchase order moves in the opposite direction. A buyer sends a purchase order to a seller to request goods or services. Usually, the buyer will already have the seller's terms and will complete the purchase order to match those terms. 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 invoices 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.
Why should businesses 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 review the terms of the pro forma invoice before making the transaction official.
Pro forma invoices can serve as a sort of protection for sellers. They help insulate 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. Pro forma invoices offer the chance for both parties to review the transaction details 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, simply 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.