Proforma Invoice Complete Guide
A proforma (also spelled pro forma) means “basis for comparison.” It’s essentially an estimate or quote by a seller for products and services intended to be sold to a customer. It’s like a preliminary bill, although it’s not an official bill that requires payment. These invoices describe the seller’s intent to sell specific items at certain prices.
Since they do not constitute an agreement by the buyer, it’s not the same thing as an official business invoice. In other words, a proforma is not a legally binding contract of any kind.
When Does the Seller Issue a Proforma Estimate?
Proformas are issued prior to a customer placing an order and serve as guides to help customers make purchasing decisions. One of the most common reasons for proforma invoices is when not all the complete details of a product or service are in place yet. When a contractor, for example, inspects a homeowner’s roof to assess repair or replacement, he or she issues an estimate to give the homeowner a ballpark figure of the price. Once the work gets underway there may be new discoveries of work that need to be done. The contractor then will alert the customer about the additional charges.
Another example is when a motorist takes their vehicle to an auto shop to diagnose a problem. The mechanic will likely charge a set fee for the diagnostic test and then report the results to the customer along with an estimate. If the customer agrees to the work, the auto shop gives them a printed estimate.
The mechanic will notify the vehicle if additional work or parts are needed and it’s up to the customer to give approval. Once the work is completed, the mechanic issues a complete bill.
Sometimes a vendor will issue a proforma if the customer has no purchasing history with the business. It can be used to establish the customer’s contact information that can later be converted to a customer account.
What Information is Required in Proforma Invoices?
The main items on a proforma are the customer’s name and contact info, along with a list of goods or services to be sold that include approximate prices. The form should include any important data that is relevant to the purchase, such as description of goods or services, quantity, and weight. It should also contain the date and the seller’s basic business contact information.
An official invoice, however, includes more comprehensive details, since it will be entered into the books. It usually includes a unique purchase order number, date when the goods or services will be delivered, payment or credit terms and product details such as serial numbers.
Difference Between Proforma and Regular Invoices
The main difference between proforma invoices and regular invoices is that proformas are simply “good faith agreements,” whereas actual invoices are real bills that require payment. While a proforma is a preliminary estimate, an invoice is the final list of charges, which are usually paid once the product is delivered or services are performed.
A proforma does not go into bookkeeping nor is there any transaction conducted, whereas a true invoice lists details of the exact amount due for the listed goods or services and is charged to the customer’s account.
Another way to compare the two forms is that proformas are used to persuade sales, whereas invoices are used to confirm sales. In that sense, a proforma can be considered a “dummy invoice” that is typically requested by the customer, whereas an actual invoice is a request for payment from the seller to the buyer.
Reasons for Using Proforma
The main reason for proforma invoices is to make the sales process go more smoothly. It’s a step toward informing a customer of pricing before any transaction or exchange of goods or services is performed. Once the customer agrees on the price it sets the sale in motion.
Proformas are useful for several other reasons, such as sending to customs to help set initial estimates of value. It’s more of a courtesy statement to let buyers know what to expect. It’s common for businesses to request proforma invoices so they can submit them to their executives for approval.
Another reason for proformas is that they can be used to write down notes pertaining to the customer’s interests or flags that indicate the stage of the process. While the estimate may be folded up and turned into a scratch paper by the customer, it’s still important for both a proforma and invoice to have professional appearances. This goal can be achieved with software-based templates.
Issuing Proforma Invoices with EasyStaff
EasyStaff streamlines the invoicing process by first issuing a proforma to the customer. Once the customer agrees to the estimate, we convert the form into a commercial invoice. The value shows up in the customer’s account only if they agree with the estimate and the proforma is converted to a true invoice.
This process is more simplified and eliminates the possibility of customers getting the two forms confused.