Invoices are an essential part of a company’s sales process. They provide details for buyers and sellers and help facilitate payment. Used strategically, invoices can be more than that. Pro forma invoices, for example, can serve as a key communication and negotiation tool for your business.
But what exactly is a pro forma invoice? Explore how pro forma invoices ensure full transparency between parties, where they fit into sales agreements, and what role they play in your accounting practices.
What Is a Pro Forma Invoice? A Primer on Its Use
A pro forma invoice is a preliminary invoice delivered to a buyer before the shipment of goods or services. It serves as a bill of sale in advance and outlines the details of the transaction, including:
- The price and description of the goods or services being purchased
- Any additional fees, such as shipping or tax
- The delivery date
From Latin meaning “as a matter of form,” a pro forma invoice is a good faith document for a committed customer that provides them with a detailed estimate ahead of time. It allows for final negotiations to occur and prevents the possibility of disputes when the standard or final invoice is issued.
A pro forma invoice is not legally binding, and the amounts it includes are estimates. It also cannot be used for accounting purposes, as it is a preliminary estimate with an expiration date, not a formal request for payment. A pro forma invoice is, in essence, the first draft of a standard invoice.
For example, if a customer orders 1,200 units of your product, your pro forma invoice will detail how much each unit will cost, how much additional fees and taxes will add to the total, and when payment will be due. The customer knows what to expect and agrees to the terms, and you can have confidence that payment will be issued when your product arrives.
At that point, you can prepare the order to send with a standard invoice. When reconciling your books, your bookkeeper will record the payment by linking your customer’s payment to the standard invoice number, not the pro forma invoice number.
How Pro Forma Invoices Differ From Other Sales Documents
Price, amounts, fees and taxes appear on several business documents associated with sales. A pro forma invoice might bear some resemblance to purchase orders, quotes and standard invoices, but they are not the same. Here’s how they differ.
Purchase Orders
A purchase order (PO) itemizes an order of goods or services and is issued by the buyer to the seller. If your company ordered 25 new laptops, for instance, you would create a PO to submit your order to the seller, then use it to check that you receive the number, make and model of laptops you ordered, with no substitutions. For accounting purposes, your bookkeeper or accountant would also match your PO number to the issued invoice.
Quotes
A quote is an estimate of the cost of the goods or services under discussion and is provided by the seller to the buyer. A quote is the first indication of the transaction’s cost and is often a response to an exploratory inquiry. You might create a quote to encourage purchase by including a time limit on the outlined purchase price. It is not a legally binding document but rather a reasonable assessment of the cost.
Standard Invoices
A standard invoice is a formal request for payment issued after delivery, while a pro forma invoice is a preliminary estimate before delivery. While the total cost may be the same on both invoices, the standard invoice is a finalized document and the pro forma invoice is a preparatory bill of sale. If your company ordered 25 new laptops, your accountant or bookkeeper would check the shipment against the PO, then pay the seller using the number on the standard invoice issued with your order.
| Pro Forma Invoice | Standard Invoice |
| Document title must be “Pro Forma Invoice” | Document title can be “Sales Invoice” or “Invoice” |
| Contains all essential invoice information | Contains all essential invoice information |
| Lets the buyer know the terms of the sale; subject to negotiation | Requests payment from the buyer; not open to negotiation |
| Costs are estimates | Costs are final |
| Issued before the sale is confirmed | Issued after goods or services are delivered |
| Not an official request for payment | An official request for payment |
| Not a legal document | A legal document recording the transaction |
| Not used for accounting purposes | Used for accounting purposes |
Why Should Companies Use a Pro Forma Invoice?
Pro forma invoices serve as helpful sales communication tools. This invoice streamlines sales transactions and acts as a statement that your company is able to provide the goods or services at the outlined price. Your pro forma invoice also provides your customers with pricing clarity before a sale is finalized, allowing room for further negotiations of cost and expectations before any work begins.
For example, if your company provides data privacy training, your pro forma invoice would likely outline how many hours of training would be provided and on what dates, as well as the specific cost per hour and the number of employees it would cover. The pro forma invoice allows both you and your client to negotiate the optimal number of hours or employees, the timing or other considerations.
Using a pro forma invoice also helps businesses rationalize their financial planning and secure the amount needed for payment. The client purchasing your data privacy training services can use your pro forma invoice to allocate the necessary resources on the specified date, which might involve shifting funds or changing budget projections.
Pro Forma Invoices and Foreign Trade
A pro forma invoice is helpful in foreign trade, often serving as the first official document exchanged between seller and buyer. Because it outlines all the terms of the transaction, including taxes and import duties, international customers can more accurately evaluate the terms of the proposed deal. A pro forma invoice is also one of the entry documents commonly required to obtain a shipping license, especially if a commercial invoice isn’t available at the time of shipment.
In addition, pro forma invoices can help overcome language barriers by presenting information in a standard form, and they can lessen the risks of misunderstanding between parties and boost the chances of building a strong and durable international trading relationship.
Customs and Pro Forma Invoices
According to the International Trade Administration, a pro forma invoice provides customs authorities with the detailed information required to clear the customs process. While not necessarily a legal requirement for foreign trade, a pro forma invoice might be needed to:
- Apply for an importing license
- Arrange for an inspection before shipping
- Declare the value of sample shipments
- Establish a letter of credit
- Transfer hard currency
A commercial invoice for foreign trade is the formal business document legally required to clear imports and exports. If your client has paid in advance, your pro forma invoice acts as a payment request. It must be followed with a commercial invoice within a reasonable time frame, usually 120 days.
Crucial Elements of a Pro Forma Invoice
There is no single standard for creating a pro forma invoice: its appearance will vary depending on the type and scope of the transaction. Most accounting software programs have templates or shortcuts that can help. (You can also work with a skilled financial bookkeeper who can customize pro forma templates to suit your specific needs.)
A pro forma invoice must always be labeled as such to differentiate it from a sales or commercial invoice. Other key elements include:
- Your company details, including name and contact information, billing address and shipping address
- Buyer company details, including name and contact information, billing and shipping addresses
- A detailed description of the goods or services
- A comprehensive price breakdown
- A breakdown of taxes and other fees (shipping, handling, etc.)
- The estimated total
- The date the pro forma invoice was created and its expiration date
- Payment terms, including the due date, any discounts, how long the pricing structure applies, how to pay, etc.
- Any other specific terms requested by either the buyer or seller
Make Pro Forma Invoices Part of Your Sales Process
Using a pro forma invoice assures your customers that you can provide the goods or services they need at a specific price in a set timeframe. It gives both parties a final chance to negotiate sales terms and ensures complete transparency in payment terms and timing, streamlining the payment process.
Adding pro forma invoices to your sales process is one of several ways an experienced accountant can add efficiency to your business model. An accountant can optimize your financial records while maintaining legal and GAAP reporting compliance. If your business lacks a full-time accounting expert, you can access top-tier accounting and bookkeeping support through Paro.
Paro’s network of accountants and bookkeepers can implement the controls, processes and systems your business needs in order to grow. With experience serving more than 60 industries, Paro can rapidly match you with the right accountant for your company’s invoicing needs.
