What is a Proforma Invoice and When to Use It

“Just send me a proforma invoice.”

Embarrassed to ask what’s a proforma invoice right there and then, you nod in agreement and decide to look it up after.

So you are here now and we will tell you all there is to know about proforma invoices so you are never in doubt how and when to use them.

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What is a proforma invoice?

A proforma invoice is sent by a vendor in advance of shipment or delivery of goods/services.

It usually contains the type and quantity of goods, their value and other valuable information such as weight and transportation charges.

It is commonly used as a preliminary invoice with a quotation, or for customs purposes in importation.

It is not a “true” invoice. It doesn’t go in the books, and you can’t use them for claiming VAT, because there is no demand or request for payment.

Proforma Invoices have three purposes:

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1. They act as a quotation

They describe items, list the price and all terms and conditions of sale.

2. To get money from the bank to buy the items

If the purchaser would like to borrow money to pay for an imported purchase order a bank would require an Original Invoice. But, he can’t get an Original Invoice until the products are actually shipped. So he asks for a proforma invoice to prevent unnecessary delays.

3. To obtain an Importation Permit

If the purchaser is importing the goods some countries require an original invoice to issue a permit. But, you guessed it, there is no original invoice until the products are sent on their merry way. So he gets a proforma invoice to obtain the required permit.

It’s almost like they are a thing to tick off some bureaucrat’s list.

Like something for the sake of form.

A pro forma.

via GIPHY

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When to use a proforma invoice?

When the client asks you to.

There is no reason to issue a proforma invoice on your own. Clients will ask for it when they need it.

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Proforma Invoice vs Quote

Proforma invoices and quotes are basically the same thing.

Their purpose is the same, to present clients with an estimate before the final invoice.

The only difference between them is that they are issued in different stages of the buyer-seller journey.

A quote is sent at an early stage, usually just after a preliminary discussion. And it’s a rough estimate of the job.

While a proforma invoice is issued after reaching an agreement. A client would request a proforma invoice so he can issue a purchase order and satisfy the accounting department.

Or the bank.

Or the customs.

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Proforma Invoice Example

A proforma invoice is issued in the same format as a regular invoice.

The two major differences are the lack of an invoice number and that it must be titled Proforma Invoice.

Other than that, the content is the same.

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Is proforma Invoice Legally binding?

A proforma invoice is not legally binding. The client has no obligation to make a purchase nor is an entry made in the books of accounts.

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Is a proforma invoice a valid tax invoice?

A proforma invoice is not a tax invoice and payment should not be made until a tax invoice is received.

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Does a proforma invoice show VAT?

Proforma invoices should contain details about VAT for VAT registered businesses as this gives a clear indication of total costs.

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