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Proforma invoices: What are they and how to use them.
Discover how proforma invoices help you give clear, detailed cost estimates upfront. Understanding how to bill clients properly is essential for building a successful business. Providing clear, professional proforma invoices sets expectations, fosters trust, and strengthens client relationships.
What is a proforma invoice?
A proforma invoice is a preliminary document that outlines the details of a sale before goods are shipped or work is completed. It helps both sellers and buyers understand the costs and terms of a transaction before making a final commitment. Common uses include:
- Service agreements: To confirm the scope and cost of services before work begins.
- Purchase approvals: For buyers needing internal sign-off before placing an order.
- Order commitments: As a non-binding agreement to supply products or materials.
- Customs Declarations: To estimate the value of goods for import permits and customs clearance.
- Financing: To help buyers secure funding or open letters of credit based on estimated costs.
Benefits for sellers:
- Provides buyers with a clear breakdown of costs, delivery details, and payment terms.
- Helps secure a buyer’s commitment before issuing a final invoice.
- Supports smoother international transactions by outlining necessary import details.
Benefits for buyers:
- Offers a transparent estimate of the total cost, including delivery timelines and payment deadlines.
- Helps with financial planning and obtaining necessary approvals.
- Acts as a formal quotation without creating a binding payment obligation until the final invoice is received.
How does a proforma invoice work?
A proforma invoice acts as a preliminary agreement, outlining the details of a potential sale before any products are shipped or services are delivered. Here’s how the process typically works from the seller’s side:
- Quote request: A potential customer asks for an estimate of costs for goods or services.
- Draft invoice: You prepare a proforma invoice that includes:
- Description of goods or services
- Quantities or hours required
- Estimated prices
- Shipping fees or other charges (if applicable)
- Payment terms and expected timelines
- Review & adjustments: The buyer reviews the document. If they spot errors or need changes, you can adjust the details before moving forward.
- Buyer’s approval: Once the buyer agrees to the terms, they confirm their acceptance—though this is not a formal payment obligation.
- Proceed with order: After acceptance, you begin fulfilling the order or start work on the requested services.
- Final invoice issued: Once the goods are shipped or the work is completed, you send a final commercial invoice, which is legally binding. The buyer pays based on those final terms.
A proforma invoice helps prevent misunderstandings by ensuring both parties are aligned on pricing, delivery, and payment expectations before work begins.
Does a proforma invoice create a legal obligation?
A proforma invoice does not usually create a legal obligation to pay. It acts as a preliminary document that outlines the estimated costs and details of a sale before any work is done or products are delivered. Key points to understand:
- Not an official payment request: It’s not a final invoice, so the buyer is not legally required to pay based on it.
- Used for estimates & planning: It serves as a draft or quotation, helping both parties agree on pricing, quantities, and terms before proceeding.
- Clarifies transaction details: It allows sellers and buyers to confirm order specifics and adjust as needed before issuing a formal invoice.
- Useful for records: While not enforceable, it can be kept for future reference, tax records, or budgeting.
A commercial invoice is issued after the work is completed or goods are shipped—that’s the document that legally requires payment.
What’s the difference between a proforma invoice and a final invoice?
Understanding when to use a proforma invoice versus a final invoice is crucial for accurate billing and smooth transactions. While they may look similar, their purpose, timing, legal status, and content differ. Here’s a clear breakdown:
- Purpose:
- Proforma invoice: A preliminary document that outlines estimated costs and terms before goods are shipped or services begin.
- Final invoice: A formal demand for payment after the work is completed or products are delivered.
- Timing:
- Proforma invoice: Sent before the order is fulfilled—during the negotiation or approval stage.
- Final invoice: Issued after completing the work or once goods are shipped.
- Legal Standing:
- Proforma invoice: Not legally binding—it’s viewed as a quote or estimate.
- Final invoice: Legally enforceable, requiring the buyer to pay the specified amount.
- Content Differences:
- Proforma invoice: Lists expected costs for products, services, and delivery.
- Final invoice: Includes actual totals, updated charges (e.g., shipping adjustments), and payment terms (e.g., “Due upon receipt” or Net 30).
- Common Use Cases:
- Proforma invoice: Used for securing internal approvals, customs declarations, or financing.
- Final invoice: Used for requesting payment after order completion.
Key Takeaway:
- Proforma invoice = estimate → Helps align expectations.
- Final invoice = payment request → Concludes the transaction.
Frequently asked questions
How is a draft invoice different from a proforma invoice?
While both draft and proforma invoices are preliminary documents, they serve different purposes:
Draft invoice:
- Internal document used within a company to check pricing, totals, and accuracy before issuing a final invoice.
- Often reviewed by internal teams or departments before being shared with a client.
Proforma invoice:
- External document provided to a buyer as a cost estimate or order summary before the sale is final.
- Commonly used for securing approvals, customs paperwork, or confirming transaction terms.
Should you pay a proforma invoice?
- No - payment is not required for a proforma invoice.
- It acts as an estimate and is not a final demand for payment.
- Wait for the final invoice from the seller before making any payments.
What’s the difference between a proforma invoice and a supplier invoice?
These invoices are used at different points in the sales process:
Proforma invoice:
- Issued before goods or services are delivered, to outline estimated costs and transaction details.
- Used for approvals, negotiations, and customs clearance, but not a payment request.
Supplier invoice:
- Sent after delivery of goods or completion of services.
- Official request for payment, listing the final total, payment deadlines, and relevant taxes.
- Often issued specifically by suppliers or vendors as part of standard invoicing.
More resources
https://main--dc--adobecom.hlx.page/dc-shared/fragments/roc/blog/business/do-more-with-acrobat-blade
