Everything You Need to Know About Proforma Invoices
In the business transaction world, there are different documents that will be used in order to have a smooth flow of information and proper handling of financial aspects. One of the documents is called the proforma invoice. But what is it? How does it fit into the purchasing and selling process? Let’s break everything you need to know about proforma invoices.
What is a Proforma Invoice?
A proforma invoice is a bill sent to the buyer before actually selling the product or service. It is rather a “quote” that presents a detailed description of the goods or services that are being quoted, along with their respective prices. It shows the buyer an estimate of what the total price of the sale will be when all the possible taxes, delivery charges, etc., are taken into account.
- Key Point: While a proforma invoice is an important document in the sales process, it is not a demand for payment.
- Purpose: It’s simply a document that provides the buyer with an early look at what the final invoice might look like.
Reasons to Use a Proforma Invoice
There are several reasons why businesses and individuals use proforma invoices in their transactions. Some of the main advantages include:
- Setting Clear Estimate:
- The proforma invoice sets clear expectations by presenting the buyer with an estimate of total cost in terms of the goods purchased or services availed.
- Flow of International Transactions:
- In international business, proforma invoices establish an essential part of clearing customs as they define the value of goods for customs duties, taxes, and shipping purposes.
- Financing:
- In obtaining financing from the bank or even a financial organization, a proforma invoice helps to serve evidence of revenue realized from the selling of the property, thereby working as an endorsement for a request for a loan.
- Terms and Conditions of the Deal Clarified:
- This paper can be clearly used to present the terms of the deal—from payment terms and delivery dates, among others—for both the buyer and seller to agree on before the actual selling process.
Key Elements of a Proforma Invoice
A proforma invoice should contain all the details like a final invoice, but usually it is less formal and for estimating purposes. The main sections in a proforma invoice include the following sections:
- Seller’s and Buyer’s Information:
- The names, addresses, contact, of the seller and the buyer should be in the document.
- Invoice Number:
- Every proforma invoice should be assigned a specific identifier or invoice number for traceability purposes.
- Description of Goods or Services:
- This is the detailed list of the goods or services being sold, including the quantities, prices, and other relevant information.
- Total Estimated Cost:
- The proforma invoice must contain the total cost of the transaction, which includes taxes, shipping charges, and other costs that may apply.
- Payment Terms:
- This section indicates how and when payment is expected, such as a specific due date or installment plan.
- Validity Period:
- Since proforma invoices are estimates, they usually have an expiration date, which indicates how long the offered prices and terms are valid.
- Other Terms:
- Other details like delivery dates, warranties, and guarantees can also be included in this section.
Proforma Invoice vs. Commercial Invoice
While the proforma invoices and commercial invoices may seem similar, they are used for different purposes. A commercial invoice is an official document used after the transaction has been completed, requesting payment. In contrast, a proforma invoice is only a preliminary estimate sent before the transaction is finalized.
- In simple words:
- Proforma Invoice = Pre-sale estimate
- Commercial Invoice = Post-sale request for payment
How to Create a Proforma Invoice
Creating a proforma invoice is straightforward. Here’s a step-by-step guide:
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