Invoice, proforma invoice, quote, delivery note - differences and functions

When it comes to getting paid, there are a variety of important documents that you may use during the sales process. Some of these are always required, others are optional. It’s important to understand their function in the course of a sale and not confuse their roles.

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In the sales process, billing is a crucial part of the process: making sure you get paid for the product/service you’ve provided. However, there can be many documents involved in a sale, some are legally required, while others might be useful for your industry, business, or included in your sales process as a personal preference. 

Here are the main documents you’ll likely encounter during a sales process:

Of course, these aren’t necessarily the only documents involved in a sale. There might also be reminder letters and payment receipts, but these are circumstantial. This article focuses only on the four above.

Quotations and how they are used

A quotation or ‘quote’ is a document issued by the seller that outlines the expected products/services that will be included and the prices. This is different from even another document, known as an ‘estimate’, in that the prices provided in a quote is agreed upon as soon as the quote is accepted by the customer.

If the customer does not agree to the quote, they can discuss any desired changes with the seller, who can then make the changes and send the customer an updated quote. This can happen more than once before the customer accepts the quote. 

The prices set forth in a quote are agreed to by both the customer and the seller - this means that even if the work or products are beyond what is quoted, the price cannot be altered. 

A quote might sound similar to an invoice but has some significant differences that should be kept in mind:

  • A quote is only a commercial document, it’s not used in accounting

  • The document must clearly state that it’s a quotation

  • The numbering of the quotes is not required to follow a set sequence

Quotes are used to provide customers with an outline of the final services so that there aren’t any surprises on the invoice. It’s commonly asked whether a quote can be used to collect a deposit - the answer is: no. An invoice must be issued in order to collect any payment.

Proforma invoices: when and how to use them

Proforma invoices are perhaps frustratingly similar to quotes. They’re used at similar times in the sales process and both provide the customer with information about the details of a sale. However, there are crucial differences that should help you determine which is right for your business.

A proforma invoice is typically used before the full, final details are known about the sale. However, quotes just provide more information about what the customer could expect from the sale. In other words, a proforma is used when the customer has committed to the sale that was set out in the quote, but there are still details to work out.

The following points should be kept in mind when working with proforma invoices:

  • It’s not a valid document to be used in business accounting

  • A proforma invoice cannot replace an invoice

  • Payment cannot be taken from a proforma invoice

Proforma invoices are commonly used in international trade when the full details of a sale aren’t yet known. 

When creating a proforma invoice, it’s also important that a few requirements are met:

  • It must be clearly labelled as a proforma invoice

  • No numbering system is used

Converting a proforma invoice to an invoice can be a simple process once the details of the sale are finalised. This is especially so with invoicing software, which gives you the option to create a completed invoice with a click.

The invoice and its purpose

The invoice is arguably the most essential document when it comes to getting paid. Many businesses cannot function without issuing invoices. Invoices are official business documents that pertain to the validity of a transaction.

An invoice is used in business accounting, and as part of bank reconciliation when recording incoming cash flow.

As it’s the central legal document of a sale, there are generally strict guidelines about what must be included on an invoice. This can differ depending on the country in which your business is based. In the UK, the following information must be provided on every invoice:

  • A unique, sequential invoice number

  • The contact details of the seller

  • The contact details of the buyer

  • The sale and supply dates

  • A description of the products/services

  • Subtotal of the sale

  • VAT (if applicable)

  • Total amount due

If you’re working in a particular industry there might be additional requirements, for example under the Construction Industry Scheme (CIS) in the UK, a tax deduction must be included on some invoice lines.

Issuing clear, professional invoices not only helps you stay on top of your business finances but can also help you gain more customers.

Delivery notes: when to use them

A delivery note is a document that is sent with a shipment of goods. Like the quote and proforma invoice, a delivery note has no fiscal value - it’s not essential for accounting purposes.

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