What is a proforma invoice? Everything you need to know

Invoicing may not be the most exciting task in the day-to-day running of your business, but its importance is undeniable: it maintains the cash flow coming into your business. Understanding the different types of invoices is therefore key to the development of sound business practices in your company. Here’s a quick introduction to the proforma invoice and how you should be using them in your business.

In this article, you’ll learn:  

• What a proforma invoice is

• How a proforma invoice differs from an invoice or quotation

• When you should use a proforma invoice

• How to best create a proforma invoice

Almost all businesses handle invoices in one way or another, whether it’s issuing them themselves or receiving them from suppliers. Invoicing is, after all, an essential part of running a business, allowing you to get paid on time, keep track of your earnings and expenses, and prepare your books for tax day. But what about proforma invoices?

What is a proforma invoice?

You may be familiar with the term ‘proforma invoice’, especially if you’re a business owner already adept in the world of invoices. But for those of you left still scratching your heads, a proforma invoice is essentially a provisional bill of sale that you send to your customer before you deliver your goods or services.

It typically contains a date of issue, a description of what is being sold, and the total amount payable as well as any taxes or fees that may be incurred between the time of issuing and when the delivery is made. The goal of a proforma invoice is to avoid exposing your customer to any unanticipated charges or duties.

A proforma invoice looks very similar to an invoice. What differentiates the two, however, is that a proforma invoice’s terms of sale can still be changed. This means that it only applies to sales that have not yet been completed.

They also do not have a unique, sequential invoice number – something that is required on all legal invoices – and must be clearly labelled as proforma. Crucially, a proforma invoice has no fiscal value and does not contain a means of payment, so it should not be included in your accounting records.

What’s the difference between an invoice, a proforma invoice, and a quotation?

On the surface, proforma invoices and quotations have quite a lot in common. They’re both used largely in the same way, both provide information about a sale and neither are legal documents in their own right. Where they differ is in their purpose.

Quotation

A quotation is sent to a potential customer who has expressed interest in buying from your business. It's considerably less formal than a proforma invoice and is usually sent during the early stages of the sale when the customer initially enquires about your prices.

Importantly, a quotation is not a document with any kind of obligation or expectation behind it. Like a proforma invoice, it holds no financial value and the sale can be accepted by the customer or it can just as easily be cancelled without any consequences.

Proforma invoice

A proforma invoice is also sent to a customer before your products are delivered or your services provided, but it is considered more binding than a quotation – although not legally binding like a completed invoice.

More detail is provided, and there is room for manoeuvre in terms of negotiation before any payment is made.

In most cases, a proforma invoice is issued after the customer has committed to the purchase, but the final details of the sale are yet to be confirmed (e.g. quantity).

Invoice

Invoices are sent when goods have been sold or services rendered and the payment is now due. The document is a binding agreement, and the customer has an obligation to pay the price stated. And unlike with proforma invoices, you can use invoices to reclaim VAT.

So, in short, you should issue a proforma invoice prior to the details being finalised and an invoice when that sale is finalised.

When should you send a proforma invoice?

There are two main reasons why your business may need to create a provisional bill of sale in advance of the actual sale. Either you want to declare an estimate of the final cost of the item or service you’re providing, or you want to ship internationally.

Cost estimate

Proforma invoices serve as a sort of good faith agreement between you and your customer. 

They are a baseline for a sale, a breakdown of the items with an accurate indication of the total amount due – but you are not requesting payment.

This makes a proforma invoice the ideal option when a sale hasn’t yet been finalised or the goods or services are still under negotiation, as you’re providing a format that can later be adjusted if necessary.

International shipping

Since they often include details about shipping, packaging, weight, and delivery fees, proforma invoices are often used in the international shipping industry. They help to declare the value of an item so that it can pass through customs quickly and be delivered to your customer on time.

What should a proforma invoice look like?

There are no specific requirements regarding the structure of a proforma invoice. But it’s both easier and safer to have it resemble as closely as possible the structure of the finalised invoices you create.

As a result, proforma invoice templates generally include:

• The date of issue

• Contact details for both the buyer and the seller

• Details of the goods or services, and their agreed prices

• VAT and other applicable taxes

• Shipping costs, if any

• The total amount due

If you’re still creating your own invoices manually, it’s easy enough to adapt your invoice template to suit the needs of a proforma invoice.

Just remember to properly label the invoice as ‘proforma’ and make sure it doesn’t contain an invoice number, as this will change what is an informal document into a binding one. A payment due date and exact date of delivery are also not required.

How do you create a proforma invoice?

While Word and Excel do offer invoice templates, they take time and meticulous attention to detail to fill in correctly. What’s more, you might encounter complications further along the sales process if you enter numerical data incorrectly in your invoices.

Invoicing software is the safest option for any business seeking full and prompt payments as well as quick and easy bookkeeping.

And while it’s a common phrase today and rarely literal, in the case of some invoicing software it really does take ‘just a few clicks’ to create a completed invoice. No tedious updating or double-checking invoice numbers. It’s automatic and instant.

SumUp Invoices provides easy-to-use invoice templates that can be used to create and send invoices in less than a minute. And with everything automated, your invoices are guaranteed to be faultless.

This is ultimately essential in the running of a business, as issuing error-free invoices increases your professionalism, facilitates the payment process, and keeps your books in tip-top shape.