What is a Proforma Invoice? Definition & When to Use It

Navigating the nuances of business transactions can be complex, especially for businesses venturing into a new market or looking to streamline sales processes.

A proforma invoice plays a crucial role in this landscape, but what exactly is it, and when should it be used?

Here, get the clarity and insight you need to learn when and why to use them. You’re in the right place for the answers you’re looking for.

Key Takeaways

• A proforma invoice is a preliminary bill of sale sent before terms are finalized.
• It outlines the details and costs of products or services but is not a demand for payment.
• Proforma invoices differ from other invoices in terms of purpose and legal standing.
• Creating a proforma invoice involves clearly and concisely detailing the transaction without implying it as a finalized billing document.

What is a proforma invoice & how it works?

A proforma invoice is basically a document that sellers provide to buyers before the delivery of goods or services.

It details the items the buyer wishes to purchase and estimates all associated costs. Unlike a standard invoice, it is not a legal request for payment.

It leaves room for buyers to negotiate better terms before a sale is finalized.

Once a sale is finalized and goods or services are delivered, a standard invoice detailing the transaction and requesting payment is issued.

Examples of proforma invoices

Below are a few pro forma invoice template examples to see what how a proforma invoice is structured and what one looks like.

See the live template example here

See the live retail proforma invoice template example here

Proforma use cases

Performa invoices can be used in a number of cases, such as:

• Quotation or Estimate: A proforma invoice is often used as a quote or estimate, providing the buyer with detailed information on the cost of goods or services before an agreement is finalized.
• Customs Documentation: For international shipments, customs may require a proforma invoice to determine the value of goods and assess duties and taxes before the actual commercial invoice is available.
• Prepayment Requests: Sellers can use proforma invoices to request a deposit or prepayment from buyers before the delivery of goods or services.
• Financial Planning: Buyers may use proforma invoices to apply for letters of credit, import licenses, or to arrange funding since it provides a detailed forecast of the costs involved.
• Export Control: Exporting countries require performa invoices to grant export permits or control certain goods’ exports based on the preliminary information provided.

Proforma invoice vs. commercial invoice vs. invoice

A proforma invoice sets the stage for a transaction; a commercial invoice confirms the completion of a sale and a regular invoice requests payment for completed services.

Comparison	Proforma Invoice	Commercial Invoice	Invoice
Purpose	Lets the buyer know what to expect from the sale and allows for negotiation	Requests payment from the buyer	Requests payment from the buyer
Issued	Before sale confirmation	After goods are shipped or delivered	After goods or services are delivered
Legal Status	No legal obligation; gesture of good faith	Legally binding record of the transaction	Legally binding record of the transaction
Accounting	No use for accounting purposes	Can be used for accounting	Can be used for accounting

How to create a proforma invoice

Creating a proforma invoice involves several straightforward steps:

1. Start with a template: This ensures the word “PROFORMA” is prominently displayed, and you don’t potentially miss information you must include. You don’t want this to be confused with a formal invoice in any way.
2. Include buyer and seller contact information: Include names, addresses, phone numbers, email addresses, etc. for both parties.
3. Provide detailed descriptions of the goods and services: Describe the items or services to be provided, as well as prices (in the expected currency) and totals.
4. List the terms of the sale, payment terms, and shipment details: Outline the sale and payment terms, along with shipment details.

The bottom line

Understanding and using proforma invoices can significantly streamline the pre-sale process, clarifying and establishing expectations for both parties.

They serve as an essential tool in trade and can help secure financing since it gives a clear snapshot of the pending transaction.

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