A proforma invoice is an estimated bill that is provided to committed buyers before a transaction takes place. It acts as a preliminary draft of the invoice that both parties have negotiated upon.
It contains information such as the quotation and description of the goods or services that are offered, terms of payment and delivery, and details of both the buyer and the seller.
While it is not a required document for international shipping, the information provided allows buyers to legally import the product.
Uses of a Proforma Invoice
While a proforma invoice is not legally binding, it is often used to safeguard the interests of both the seller and the buyer. Other uses include:
- Acting as a tentative agreement between both parties to communicate information such as price, deliverables, date of delivery and terms of payment
- Acquiring required documents such as an import license, letter of credit from a bank and contract for pre-shipment inspection on the buyer’s side
- Providing an opportunity for buyers or sellers to further negotiate the terms of sales
- Preventing misunderstandings or disputes that may arise from miscommunication
- Streamlining sales processes by eliminating the need to go back and forth if an initial contract is not drawn up
Example of When a Proforma Invoice is Used
Company ABC intends to purchase 10,000 microchips from manufacturer XYZ. As it is a big order, company ABC negotiates for a lower price, which both parties mutually agree on.
In order to manufacture the microchips, manufacturer XYZ will have to place orders for the different parts of the microchip. They will also require some time to assemble it.
Once both parties have agreed on the terms, manufacturer XYZ will draw up a proforma invoice to include the estimated price of the microchips after applying the discount, the description of the microchips and when and where they will be delivered to.
Next, the proforma invoice will be sent to company ABC for acknowledgement.
While the microchips are being assembled, company ABC can use the proforma invoice to acquire the import license and other required documents such as a letter of credit.
Proforma Invoice Template
While there are no specific guidelines that a proforma invoice should follow, this is a general template that can be used.
A proforma invoice should include the following:
- Date of when the proforma invoice was generated
- Proforma invoice number
- Seller’s details
- Buyer’s details
- Shipping details
- Number of pieces
- Total gross and volumetric weight
- Carrier
- Estimated shipping date
- Product description
- Weight and dimensions of the product
- Price per unit
- Discount, if applicable
- Total estimated cost and the currency
- Payment term
- Acknowledgement from the seller
As a general rule of thumb, the more information there is stated in the proforma invoice, the less likely the occurrence of any disputes.
Proforma Invoice vs Commercial Invoice
A commercial invoice is a legal document required for international shipping. It is used to provide proof of sale between a seller and buyer. While it may include similar information to that of a proforma invoice, there are some differences:
- Legality
A commercial invoice is recognised by law while a proforma invoice is not legally recognised.
- When it is generated
A commercial invoice is only generated when the transaction is taking place while a proforma invoice is generated before the sale happens.
- Fixed tax point
A tax point is the date on which value-added taxes (VAT) are chargeable. This is also the date on which the sale occurs. The tax point can only be fixed with a commercial invoice and not with a proforma invoice.
Proforma Invoice vs Tax Invoice
A tax invoice is issued by a supplier, registered dealer or service tax provider. It details the amount charged for goods and services and the base amount on which tax is payable.
It is compulsory for tax invoices to include the company’s registered tax identification number. However, this is not required for proforma invoices.