What is a proforma invoice? All the info

If you’re wondering, “What is a proforma invoice?” the answer is pretty straightforward. A proforma invoice is an invoice that offers a more accurate cost estimate than a quote, but isn’t legally binding like a final sales invoice. It’s usually given to a customer just before a sale is finalised to provide a complete picture of the final costs.

As a business, you can issue proforma invoices to your customers and request them from your suppliers. Since the sale isn’t finalised at this stage, both parties can negotiate or adjust the arrangement if they need to.

Read on to learn everything you need to know about proforma invoices, including how they’re structured, when to send them, and when you might want to request one.

What is the difference between a proforma invoice and a regular invoice?

Here’s the key differences between proforma and regular invoices:

Purpose

Proforma invoice: provides a detailed breakdown of the estimated costs of products or services that will be provided.

Regular invoice: provides a breakdown of the products or services already delivered, together with their final price.

Goal

Proforma invoice: helps buyers make a decision about whether to complete a sale.

Regular invoice: for suppliers to request the amount due after products or services have been provided to a buyer.

When is it issued?

Proforma invoice: before the order is finalised.

Regular invoice: after the order is fulfilled.

Is it legally binding?

Proforma invoice: No

Regular invoice: Yes

Is it used for accounting purposes?

Proforma invoice: No

Regular invoice: Yes

Since proforma invoices aren’t legally binding, they can’t be included in accounting books or VAT returns. This means that, under normal circumstances, buyers aren’t usually obliged to pay them.

What’s the structure of a proforma invoice?

If you want to create a proforma invoice, the good news is that it’s formatted almost exactly the same as a regular invoice. The only two differences are:

1. A proforma invoice must be labelled as a “proforma invoice”, and the UK government also recommends endorsing it with the words, “This is not a VAT invoice”.
2. A proforma invoice doesn’t contain an invoice number.

Other than these considerations, it typically contains some or all of the information on a standard invoice, including:

• Essential information, such as:
  
  • “Proforma invoice” written at the top, and the endorsement, “This is not a VAT invoice”.
  • The seller’s information, including company name, logo, and contact details.
  • The buyer’s relevant information, such as their name and contact details.
  • Important dates for shipping and delivery.
• A breakdown of the products and their prices: You’d usually include specifics like the product’s name, quantity, price per unit, the expected VAT, and the final price.
• Terms and conditions: This includes the payment terms, details of delivery, and any other conditions specific to the transaction.

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How can I create a proforma invoice?

You can create a proforma invoice in the same way you’d make a sales invoice, using a template or specialised invoicing software. Just keep in mind that a proforma invoice should be labelled as such, and shouldn’t include an invoice number.

After selecting the template or software you want to use, fill your invoice in with all the information you want to include, such as the buyer’s details and a breakdown of what they’ve ordered. Include your details, too, as well as the payment terms and shipping information.

Although proforma invoices aren’t legally binding, they help establish trust between buyers and sellers, and they’re also useful for customs clearance. So it’s important to make sure all the information on the invoice is correct. Typos, missing details, and discrepancies can lead to problems, shipping delays, and disputes.

When should I send a proforma invoice?

A proforma invoice is sent before a sale is finalised — that is, before your business delivers its products or services. It’s more accurate than a general quote because it offers a detailed breakdown of the costs, including any shipping fees, taxes, and other costs that may apply.

Sending a proforma helps get the customer on the same page about how much they’ll likely need to pay your business to complete the sale. It also leaves room any final negotiations that need to be conducted regarding the deliverables and their associated costs.

With these considerations in mind, here are some specific instances when businesses typically send customers proforma invoices:

1. When the customer isn’t known to the supplier: If you don’t know the customer well, you can use a proforma invoice to provide a detailed breakdown of the costs of your goods and services before either party commits to the sale.
2. When the customer’s creditworthiness is doubtful: Creditworthiness is an indication of how reliable you consider your customer to be based on their history of managing repayments and credit.
   If you’re fulfilling an order for a customer with a weak credit history, you might want to collect the payment beforehand. In this case, a proforma invoice is helpful for ensuring both parties are on the same page about the price, quantity, and terms of the sale.
3. When you’re shipping products internationally: If you’re regularly supplying products internationally, using a proforma invoice can help you reduce the risk of fines and delays by helping each party access the information they need.
   International shipping involves complex logistics, with customs workers, shipping agents, freight forwards, and carriers managing different processes. A proforma invoice outlines important information, such as shipping addresses and terms, prices, contents, and the country of origin.
4. Your customer asks for one: Sometimes, customers may ask you for a proforma invoice so they can place a purchase order.

When should I ask for a proforma invoice?

You might want to request a proforma invoice from your supplier or suppliers if you want to:

1. Budget accurately: Since a proforma invoice includes a breakdown of all the costs and any additional charges, you’ll know exactly how much to budget for.
2. Plan out logistics: A proforma invoice reveals not only cost breakdowns but also the terms, such as when the goods or services will be delivered and how you’ll pay.
3. Negotiate: Since proforma invoices aren’t final or legally binding, you can negotiate terms and prices before committing to the final purchase.
4. Compare vendors: Looking to get the best deal on a product or service? Asking different suppliers for proforma invoices can help you accurately compare various prices.

Can a proforma invoice be cancelled?

A proforma invoice doesn’t need to be cancelled because:

1. It’s not legally binding: This means the customer isn’t required to pay it, so there’s no need for them to request a cancellation.
2. It’s not used for accounting purposes: This means that it’s not included on your tax return.

Therefore, if the sale doesn’t close, there’s no need to edit or cancel the proforma.

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Proforma invoice: FAQs

Should you pay a proforma invoice?

When a proforma invoice is issued, the sale isn’t considered final, nor is the price. So you have room to negotiate, and confirm that the cost of goods and services is per your agreement with the supplier. Then, once you’re satisfied, you can make the payment and the supplier will then issue a final sales invoice.

Should I pay VAT on a proforma invoice?

You shouldn’t pay a proforma invoice, including any VAT on it. Additionally, since these invoices aren't considered to be VAT invoices, you can’t include them in your VAT returns.

Are proforma invoices illegal?

Issuing or requesting a proforma invoice is perfectly legal. But keep in mind that these invoices aren’t legally binding, so buyers aren’t obliged to pay them.

What happens after a proforma invoice is issued?

After a proforma invoice is issued, the buyer reviews all the information, including the cost breakdown and terms. They’ll then decide whether to proceed with the sale, negotiate, or cancel the order. Once the buyer gives the green light, the seller will process the order and send the final invoice.

Quickfire summary: What is a proforma invoice?

A proforma invoice is a non-legally binding document that usually includes most of the information in a standard invoice. However, proformat invoices can’t be used for accounting purposes or VAT returns, and they’re issued before a sale is complete.

These invoices are useful to both buyers and sellers in different situations. They give buyers an accurate breakdown of the costs and expected final price, and include payment and fulfilment terms. They can also simplify international shipping processes and help businesses compare different suppliers.

There are instances when your business might be asked to issue a proforma invoice, and other instances when you might want to ask your supplier for one. Having the right software or template on hand can help you expedite this process.

Also read:

• What is Making Tax Digital in the UK?
• When does the tax year start in the UK?
• What business insurance do I need?
• READ MORE BUSINESS INSURANCE GUIDES