A pro forma invoice is a preliminary bill or estimated invoice used by a seller to request payment from a committed buyer for goods or services before they are actually supplied. It serves as a commitment from the seller to deliver the specified items at a set price, and from the buyer to purchase them.
Understanding Its Core Purpose
The primary function of a pro forma invoice is to facilitate international trade, customs clearance, and to provide the buyer with a clear understanding of the upcoming transaction's details, including pricing and shipping terms. It's often used when goods are being shipped internationally or when a buyer needs to arrange financing before a final sale.
Key Characteristics of a Pro Forma Invoice
Unlike a traditional commercial invoice, a pro forma invoice is not a demand for payment and is not typically used for accounting purposes. Instead, it's a binding agreement that sets the terms for a future sale.
Here’s a breakdown of what a pro forma invoice typically includes:
| Feature | Description |
|---|---|
| Document Title | Clearly states "Pro Forma Invoice" to avoid confusion with a commercial invoice. |
| Seller's Information | Full name, address, and contact details of the selling company. |
| Buyer's Information | Full name, address, and contact details of the buying company. |
| Issue Date | The date the pro forma invoice was created. |
| Pro Forma Invoice Number | A unique identifier for tracking purposes. |
| Description of Goods | A detailed list of the goods or services, including quantity, unit price, and total amount for each item. This includes the description of the goods. |
| Total Payable Amount | The grand total of all charges, including applicable taxes, shipping, and any other agreed-upon fees. This represents the total payable amount. |
| Payment Terms | Specifies when and how payment is expected (e.g., "Payment due upon receipt," "Net 30 days," or "50% upfront, 50% upon delivery"). |
| Delivery Terms | Incoterms (International Commercial Terms) are often included to define responsibilities for shipping costs, insurance, and risk of loss (e.g., FOB, CIF). |
| Validity Period | The duration for which the quoted prices and terms are valid. |
| Other Details | Any other details about the transaction that are relevant, such as port of loading/unloading, estimated delivery date, and currency used. |
When and Why Businesses Use Pro Forma Invoices
Pro forma invoices serve several practical purposes in various business scenarios:
- Customs Declarations: For international shipments, customs authorities often require a pro forma invoice to assess duties and taxes before the goods officially enter the country.
- Securing Payment Upfront: It allows a seller to request an advance payment or a deposit from the buyer before commencing production or shipping, especially for custom orders or large quantities.
- Internal Approvals: Buyers can use a pro forma invoice to obtain necessary internal approvals or secure financing from a bank before committing to a purchase.
- Quotation and Agreement: It formalizes a quotation and serves as a preliminary sales agreement, preventing misunderstandings about pricing and terms before the final commercial invoice is issued.
- Proof of Sale: While not a final invoice, it can serve as a preliminary record of a sales commitment for both parties.
In essence, a pro forma invoice provides clarity and transparency for a potential transaction, laying out the precise terms and costs involved before the final stages of the sale.
