Have you dealt with troublesome clients or buyers who scrutinize every detail of the bill or an invoice, looking for the slightest error just to demand a full refund or file a complaint against you and your business? Then your business deserves a proforma invoice that you can utilize to display the estimate and other information clearly and transparently, allowing you to avoid last-minute changes and errors. While a proforma invoice is not the final bill, it can still serve as a formal estimate of the cost along with the taxes, items purchased, and other information before proceeding with the final payment.
This blog will explore the proforma invoice, detailing its format and how it plays a significant role in ensuring a smooth billing experience not just for the customer or buyer but for the seller or business owner too.
What Exactly Is a Proforma Invoice and Why Use One?
Derived from the Latin word meaning “for the sake of,” proforma is a preliminary bill or estimate prepared by the owner to document information including pricing, shipping address, payment terms, purchased items, and billing address. True to its name, a proforma invoice serves as a formality document that shows the buyer or the client how much they owe the seller. Thus, avoiding last-minute confusion and chaos regarding payment or address. A proforma invoice helps not only the sellers but also the buyers by giving them a glimpse of what to expect in the actual bill before the transaction, helping them be aware of any fraudulent or inaccurate claims.
A proforma invoice isn’t used for any accounting purposes, so creating one solely depends on how safe you want to operate your business. While it may look like a regular invoice, it isn’t a legally binding document or a payment demand. Instead, it just serves as a gesture of transparency and goodwill between you and your customer, laying the base for the final payment.
Imagine this: what if you had a blueprint that laid out all your expenses beforehand, giving you the chance to verify any errors or discrepancies? A proforma works the same way.
The Difference Between Quote, Proforma Invoice & Invoice
If a proforma is not an invoice, then why does it exist, and what is it actually? To understand this, let’s explore the differences between the following.
Quote: A quote is typically the first document provided by the seller when a buyer requests pricing. It gives an estimated cost for the product or service based on the buyer’s inquiry. Quotes (or quotations) are flexible and can be tailored to match specific requirements before final approval.
Proforma Invoice: A proforma invoice is a formal and non-legal document that outlines the quantity, cost, and terms of a potential transaction before the shipment of the product. A proforma invoice doesn’t serve as a request for payment but acts as a preview of the final invoice to help avoid errors or inaccuracies.
Invoice: An invoice is the final, legally binding document issued to the buyer after goods or services have been delivered. While every invoice can begin as a proforma, not every proforma qualifies as an invoice. Unlike estimates or drafts, an invoice is officially recognized for tax and accounting purposes, leaving no room for customization or last-minute alterations.
Here’s a side-by-side comparison of the key differences between a Quote, a Proforma Invoice, and a Final Invoice to help you understand when and why each is used.
| Feature | Quote | Proforma Invoice | Invoice |
| Purpose | Price estimate on request | Preview of the final invoice | Final bill for payment |
| Legally Binding | No | No | Yes |
| Timing | Before deal is confirmed | Before shipping or production | After delivery of goods/services |
| Editable | Yes | Limited | No |
| Used For | Negotiations | Internal approvals, customs, advance payments | Accounting, taxes, official payment |
Format of Proforma Invoice
Now that the differences have been studied, let’s move on to the sections of a proforma invoice. Just like the final invoice, the proforma invoice should also look professional and formal with all details entered correctly.
Header: This space holds the title “Proforma Invoice” along with the tracking number, date of issue, and the validity duration. As it’s the first thing a buyer notices, it’s important to keep the header clean and focused, free from any irrelevant information.
Seller’s Details: Here you can find the information of the seller, including their name, GST number, bank details, and address. This helps the buyer cross-check the details before proceeding with the sale.
Buyer Details: This section includes the buyer’s name, address, and contact information. It’s essential for the buyer to verify these details before finalizing the purchase, as even small errors can lead to costly last-minute changes.
Description of Goods: As the name suggests, this is where all the goods or items are listed along with the quantity purchased and their pricing.
Total Summary: Once the items are listed, a subtotal is calculated and then the applicable taxes are mentioned. After which the net total is calculated. The taxes differ from region to region, so make sure the GSTs and other taxes are per the records.
Terms & Conditions: In this section all the payment terms, delivery dates, and shipping methods are displayed to avoid confusions and challenges while finalizing the transaction.
Overall, this is how a proforma invoice is designed and formatted. A strict mention of “This is not a tax invoice” needs to be highlighted at the bottom of the proforma invoice to avoid utilizing this in the place of legal documents.
Where and When Proforma Invoices Are Most Useful
For Custom Orders: When buyers demand a customization order from the seller, issuing a proforma invoice can be beneficial as it displays the order details, right from the cost per product to the customization requirement, helping clear errors or unmatched requirements. This ensures a clean and safe start for the sellers before the production starts.
In International Trade: For imports and exports, a proforma invoice helps determine the value of goods, quantity, country of origin, import, and export guidelines for taxation at the customs office. On the other hand, the buyer uses this proforma invoice to arrange payments from financing banks or apply for foreign exchange if currency regulation is involved. Thus, the proforma invoice in international trade plays a critical role in enabling smooth logistics, compliance, and financial planning.
For Internal Approvals: Large organizations and multinational corporations function with a system that is streamlined and systematic, so having a proforma invoice helps with internal approvals from departments like finance, procurement, and management. The internal team examines the proforma invoice for details like purchase cost, supplier details, and payment terms, ensuring everything is aligned per the company’s policy before the final payment.
For Advance Payments: When sellers require partial payments in advance, a proforma invoice best serves this purpose. While it does not act as a final invoice for payment, it can still be used as a detailed summary of the bill to initiate the payment, as it displays the exact copy of the final invoice transparently giving buyers the confidence to proceed further.
How a Proforma Invoice Works in Everyday Business
Imagine a clothing brand based in Australia that serves international clients, with a major customer base in India. Managing cross-border trade comes with its own set of challenges and compliance requirements. While the brand also operates successful offline stores in the heart of the city, handling international orders demands extra caution. Before shipping products to India,
- The company first shares a proforma invoice with the buyer in India for review and approval.
- Once the buyer confirms that everything is accurate and aligned, the Australian seller proceeds with production for that specific order.
- The buyer, on the other hand, utilizes the proforma invoice to release the payment from the bank.
- The buyer can also apply for an import permit using the proforma invoice.
For its offline store in the city, the seller can use a similar proforma invoice to review order details with buyers before finalizing the payment. This approach helps prevent incorrect or unnecessary orders, ultimately saving the company thousands of dollars.
Future-Proof Your Business with Proforma Invoices
The true importance of a proforma invoice often becomes clear only when a business experiences the setbacks of not using one. With modern accounting software, creating and sharing a proforma invoice has become effortless, where all you have to do is just enter your details, and a professionally formatted document is generated instantly. You can even save templates for repeat clients with similar requirements, making the process faster and more consistent.
From cost savings to regulatory compliance, the role of a proforma invoice in today’s business landscape is significant. Platforms like Sole, a leading accounting software provider, offer ready-to-use, customizable invoice templates tailored specifically for Australian businesses. With tools like these, business owners can generate proforma invoices that meet both professional and legal standards, eliminating the need for coding or added expenses.