While you’re probably familiar with standard invoices and how to write them, pro forma invoices are a little less ubiquitous. While pro forma invoices are de rigueur in some industries, they are virtually unheard of in others. So what exactly are they, and how are these documents utilised?
What Is a Pro Forma Invoice?
A pro forma invoice, often spelt proforma, is a type of bill that shows the value of goods or services that you have not yet delivered. Pro forma is Latin for ‘as a matter of form’.
Essentially a step up from a quote, the pro forma is almost exactly the same as a standard invoice but is not legally binding. While quotes are casual and often amount to nothing, pro forma invoices indicate that the work will go ahead once the exact terms have been negotiated.
When Are Pro Forma Invoices Used?
There are two popular uses for pro forma invoices. The first is to provide a detailed estimate of costs; the second is to declare the value of international goods.
Pro forma invoices are regularly used as a good faith agreement between vendors and customers, especially when a product or service will take some time to deliver. They serve as a precise estimate of costs but are not a demand for payment.
The non-binding nature of pro forma invoices makes them a good fit for projects that are still being negotiated. It’s common to draft several pro forma invoices until both parties reach an agreement.
Once the customer agrees to the price on the pro forma invoice, the seller delivers their end of the bargain and follows up with a standard invoice.
When used in international transactions, a pro forma invoice includes product and service rates, commissions, fees, applicable taxes, currency exchange and shipping costs. The objective is to give the client the most precise estimate possible so that they are not hit by any nasty surprises. The pro forma also serves the purpose of declaring a shipment’s value to customs.
What Are the Strengths of Pro Forma Invoices?
Pro forma invoices help to streamline the sales process by agreeing on expectations before money changes hands. Consolidating the details of the deal helps to ensure that the seller and the customer are both on the same page before the transaction goes any further.
Because a pro forma invoice is not legally binding, there is room to negotiate until both parties are satisfied.
Some other advantages to pro forma invoices are:
- They perform as a stand-in when you lack all of the details needed for a commercial invoice.
- They help to prevent scope creep for freelancers; you can define exactly what work is covered by your fee.
- Many businesses request pro forma invoices for their internal purchasing approval process.
What Are the Limits of Pro Forma Invoices?
Because no money is changing hands at this point, you cannot use a pro forma invoice for bookkeeping. They also cannot be used as evidence to reclaim tax, even if they include all of the details required for a VAT invoice. This is why it’s important to follow up on a pro forma with an invoice once work is underway.
How Do I Create a Pro Forma Invoice?
You can use a standard invoice template to create a pro forma invoice. It’s essential to include the words ‘Pro forma invoice’ where you would usually write ‘Invoice’; make sure it’s easy to tell the difference at first glance. You should also make sure that it is clearly marked ‘This is not a VAT invoice’.
Once you actually supply the goods or services to your customer or receive payment you must issue a proper invoice, including VAT if it is applicable. To do this you can simply update and re-send the same document; from there on it’s exactly the same process as usual.
