Businesses frequently discuss the conditions of a contract before shaking hands on it, like the sales price, reductions, and delivery schedules. Once the negotiation is complete, it is standard procedure for the company to provide the customer with a rough invoice draft outlining the negotiated deliverables. This document is known as the proforma invoice.
A proforma invoice is a tentative bill of sale provided to consumers before the dispatch or delivery of products. The invoice would normally describe the acquired items and other pertinent information such as freight, weight and transportation charges.
When Should a Proforma Invoice be Sent?
There are two primary explanations to issue a temporary bill of sale prior to the actual transaction. Either to disclose an estimation of the final cost of the goods or services you’re offering or to ship overseas.
- Estimated cost
Proforma invoices function as a kind of good faith contract between you and your client. They serve as a starting point for sale, with a summary of the items and an approximation of the total amount required but without a demand for payment.
A proforma invoice is the best solution when a sale has not been confirmed, or the items or services are being negotiated as you’re offering a structure that can be altered later.
- Shipping overseas
Proforma invoices are commonly utilised in the global shipping business since they frequently include specifics concerning shipping, packing, quantity, and delivery costs. They help in the declaration of an item’s worth, allowing it to clear through customs promptly and be shipped to your consumers at the right time.
Benefits of a Proforma Invoice
The key benefit of a proforma invoice would be that you do not have to amend it if there is change in products or services since it is not a finalised sales invoice. Other benefits include:
- When products are at risk of being ruined in transit: If the things are damaged when they arrive, you must normally send your client a difference in the original invoice. With something like a proforma invoice, you may make changes before converting it to a complete sales invoice.
- When clients can modify their order: If a customer cancels their purchase after a shipment has been completed, your invoice will be erroneous and must be re-raised. A proforma bill can be reconstructed and changed to a complete invoice easily.
- When the project’s scope may expand: If you’ve quoted to provide a service and realise that more effort is necessary than anticipated, you’ll need to issue additional invoices. You only close the sale when you use proforma invoices once the entire scope is validated.
Are Proforma Invoices Legally Enforceable?
Even though a proforma contains most of the same details as a finalised invoice, it lacks legal validity and should not be considered for accounting or as a contractual obligation.
A proforma is similar to a quotation or an estimate in many ways to an invoice. Clients are not compelled to pay the amount specified on the proforma. You can not recognise the overall amount mentioned in the proforma invoice as the customer’s payables or your receivables, and also, you cannot recover GST using a proforma.
Necessary Details in a Proforma Invoice
A proforma invoice’s principal aim is to demonstrate to your client the specifics of the intended deal. As a result, it should have the same details as the final bill:
- The words “proforma invoice” are used to let your client know it is not the final invoice.
- “It is not a tax invoice” should also be mentioned.
- Specific invoice number
- Your business’s name, postcode, and contact information
- Contact details of your client
- The issue date
- Product details
- How long is the offer good for? (expiry days/date)
- A URL to any relevant terms and conditions
- Terms of payment (may provide advice on how to pay)
- Tax (Even though a proforma is not a taxable invoice, you should include the projected tax amount.)
Difference Between Invoice and Proforma Invoice
|A document delivered to the purchaser to verify the deal and seek payment.||A documented proposal or estimate is issued before billing. It describes the products and services that have yet to be provided.|
|Advice the customer of the money owed for the goods and services given. It is legally enforceable.||To inform the buyer on what to anticipate.|
|When is it issued?||After placing a confirmed order.||Prior to order placement.|
|It is needed for payment and is recorded as accounts receivable/accounts payable. This should be archived for future use, and your financial information must be stored in case of an audit.||It provides your business with a basic sense of how much money is owed and when it should be reimbursed. However, these can not be used for income statements.|
|Should have a GSTIN, trademark, contact details, mailing addresses, details of purchases, and a portion on terms and conditions.||Should have all of the details included on a conventional invoice, but it should be prominently labelled “proforma.”|
How to Prepare a Proforma Invoice?
Although Word and Excel provide invoice templates, filling them out correctly takes time and strict attention to detail.
Furthermore, if you record numerical data inaccurately in your invoices, you may experience issues later in the sales process.
Hence, invoicing software is the most secure alternative for any business that wants complete and timely payments and convenient and simple bookkeeping.
ClearOne invoicing software helps you with multiple GST invoice templates that are simple to use and can be used to generate and distribute invoices in much less than a minute. And because everything is computerised, your invoices are assured to be error-free.