Two co-workers at a desk in a white office

Contents

  1. 1. What is a proforma invoice?
  2. 2. What is the difference between an invoice and a proforma invoice?
  3. 3. What should a proforma invoice look like?
  4. 4. Is a proforma invoice a legal document?
  5. 5. Do I need a proforma invoice if I send goods abroad?
  6. 6. Can I cancel a proforma invoice?
  7. 7. Benefits of issuing proforma invoices

What is a proforma invoice?

September 20, 2021
This article was updated 16th September 2022.Regardless of the type of business you run, you're bound to use invoices regularly. They're an easy way to keep track of what you've sold, and are fundamental to your shaping cash flow and the final figures on your tax bills.Proforma invoices are a good way to ensure clients and your company are on the same page when determining the price and the services or goods you are supplying. But what are proforma invoices?We'll explore exactly what a proforma invoice is, how it differs from a standard invoice and why you might use one.

What is a proforma invoice?

A proforma invoice acts as a 'good faith' agreement. You can use it as a draft invoice to show which services or products you are selling at what price. Proforma invoices are usually sent before a transaction has been finalised or before the work has been finished.Since proforma invoices are usually a pretty accurate indication of the final price, they can be beneficial when working with new clients The preliminary invoice can also help them decide whether they want to continue with the purchase or need to change their order in any way.

What is the difference between an invoice and a proforma invoice?

Unlike a standard invoice, a proforma invoice is an estimate of a sale rather than an official sale document. The most fundamental difference between the two is that a proforma is issued at the beginning of the sales process, whereas a standard invoice finalises and confirms it.

Standard Invoice

A standard invoice is issued to the customer after the deal has been finalised. Goods and services will only be supplied once payment has been made.Since standard invoices are legal documents, you'll need to include the following information:
    Invoice number Your company contact details Your customer's contact details A description of what's being sold Supply date Date of issue Itemised list of what's being sold Value Added Tax (VAT) Total amount due, including delivery fees Due date

Proforma invoice

As proforma invoices are carried out before a sale has been completed, with the total amount due listed typically being an estimation. This means that the figures on a proforma invoice aren't set in stone.When drafting a proforma invoice, aim for the information to be as close as possible to what you'd expect on the final invoice — minus certain snippets of information, like the supply date and an invoice number.

What should a proforma invoice look like?

A proforma invoice will typically list the following information:
    A description of the goodsEstimated price — you might find it beneficial to note this price could change based on external events, such as inflationOther essential transaction details such as company addressesDate of issueVAT — or, if you're not VAT-registered, the fact they won't have to pay VAT
Since proforma invoices don't have an invoice number attached, they can't be mistaken for standard invoices — which are legally binding documents. Just to keep things crystal clear, consider including the words proforma invoice at the top of the document.

Is a proforma invoice a legal document?

In short, proforma invoices are not legal documents. As a result, the final price is still open to negotiation between you and your clients, and won't be used for accounting purposes by either party. You'll also need to state This is not a VAT invoice somewhere on the document to confirm for their records that the price point outlined in the document is only proposed.

Do I need a proforma invoice if I send goods abroad?

If you ship to clients abroad, you'll need to attach a proforma invoice to act as a quote of the goods you're providing, as well as an official confirmation of the orderAn international proforma invoice will include shipping costs and the cost of the item in its recipient country, alongside the typical details you'd expect to find on a proforma invoice. With this document attached to your delivery, you can expect a much smoother delivery process.You'll also need to include a commercial invoice in any international shipments. This will help the customs in the recipient country work out how much the items shipped will cost in taxes and import duties, and will include an invoice number, how the goods are being transported and the weight and dimensions of the package in question.

Can I cancel a proforma invoice?

Since proforma invoices aren't legally binding documents, you don't need to officially cancel it. Instead, you can review it until both you and the customer are happy with the price and service provided, before issuing an official invoice.You or the customer can back out of the sale at any time if you've only provided a preliminary document of the sale. We recommend corresponding with the customer after a proforma issue has been invoiced to sort out any issues with the proposed purchase.

Benefits of issuing proforma invoices

    Can help speed up the payment process by giving the customer enough time to set cash asideAny disputes can be resolved before the official invoice is issuedCan be helpful when a customer hasn't fully settled on what they wantMay be needed by certain clients if their companies have an internal approval process before going ahead with an order
Steve Anderson
Steven AndersonSenior Accountant

You might also like

Freelancer working from home office | A Complete Guide to National Insurance

Rachel Cameron-Potter

·

Startup

The Complete Guide to National Insurance

Female-led startup employees brainstorming around a table | What is a VAT receipt?

Ellie Perkins

·

Startup

What is a VAT receipt?

Freelancer on the phone at wooden table | How to find work as a freelancer

Rachel Cameron-Potter

·

Freelancer

How to find work as a freelancer

Don’t take our word for it.

Try Ember for free.

With our super software and talented team of qualified accountants, taking care of your business admin has never been easier. Try us free for 14 days today.

Ember