Pro Forma Invoice Meaning Format How To Create

Pro Forma Invoice Meaning

Pro Forma Invoice is a document issued before a tax invoice by supplier/seller to buyer containing details about particulars of goods/services to be delivered to buyer including goods/services price, any other charges applicable such as delivery charges, applicable taxes, and quantity details or the total weight of the shipment.

Features of Pro Forma Invoice

The seller issued a non-binding document providing an estimated price of the goods/services yet to be provided. This invoice is issued before the tax invoice is issued. However, the following features of it will explain it better:

Non-Binding Document – Since this invoice is issued before the sale agreement, this document does not bind either seller or buyer in a contract of sale.Negotiable Price – This document provides an estimated price of goods/services to be delivered, so the price mentioned in this invoice is always negotiable.Issued before the Actual Sale is issued before an actual sale happens, providing complete details to the buyer about price, taxes, commission, shipment charges, quantity details, etc.Validity – It is valid up to a specific period, generally up to the date the tax invoice is issued.No Tax liability – Since this invoice is not a tax invoice, there is no tax liability generated on its issue.

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How to Create a Pro Forma Invoice?

There is no set pattern for creating such an invoice. The seller can choose his mode, format, and design. It includes the following details:

Date of issue.Unique serial no of invoice.Details about buyers, including his address and contact information;Details about the seller, including his address and contact information;Shipping Address.Details about the weight and quantity of goods to be delivered;A complete description of goods to be supplied, including there per unit priceUnit PriceUnit Price is a measurement used for indicating the price of particular goods or services to be exchanged with customers or consumers for money. It includes fixed costs, variable costs, overheads, direct labour, and a profit margin for the organization.read more and quantity;Any other charges such as commission, taxes, or transportation costs to be paid by the buyer;Estimated date of dispatch of an order;It can also have a validity date.

Steps in Creating Pro Forma Invoice

Example of Pro Forma Invoice

Mr. Buyer recently started a new clothing manufacturing business making shirts and pants. After significant research about raw cloth for pants and shirts, he reached Mr. Seller dealing in bulk supply of raw material and stitching threads for the last 15 years.

Identify the proposed client for which the invoice is to be made. Fill in all relevant particulars, as discussed above, including the price of goods/services on which both parties have agreed. Mention details about particular goods/services to be supplied. Finally, sign the invoice and put a date for issuing the invoice.

Mr. Seller offered one piece of 30-meter cloth for $25. Mr. Buyer estimated that he would require 2700 meters of material to meet his annual requirement. Mr. Buyer asked for a pro forma invoice containing details about the total price, quantity, shipment cost, and the weight of the shipment. Help Mr. Seller draft the pro forma invoice and fill in relevant details.

Solution

Below is the sample Pro Forma Invoice of a clothing manufacturing business –

Difference Between Pro Forma Invoice and Invoice

Difference Between Pro Forma Invoice and Quotation

When to Use?

It is an essential process for an organization. This process happens before the actual sale transactions occur. It can be used in the following situations:

Generally, it is issued in the case of new buyers with whom no dealing has happened in the past.Since it is a negotiable document, a buyer can negotiate the price quoted, and the seller can easily amend the pro forma invoice, which is not in the case of the tax invoice.To provide buyers expected price to be paid and another related cost to such sale.It can be used to get some advance paymentsAdvance PaymentsAdvance payment is made by a buyer to the seller before the actual scheduled time of receiving the goods and services. It protects the seller from the risk of non-payment. Additionally, it helps sellers financially in the production of the goods or rendering of services.read more towards the sale if the buyer accepts the invoice.It can also be used in export and import business.

Why Use a Pro Forma Invoice?

As we discussed several times in the article, it is a document issued before any tax invoice is issued. So the first and fundamental reason is:

It is a non-binding document with closely similar details to a tax invoice that can be negotiated before an actual sale transaction is performed and provides flexibility to the business.The second important aspect is that acceptance of these invoices indicates buyer satisfaction with the price demanded by the seller, and he agrees to pay such price, including other related costs.It also provides opportunities to get some advance payment for sale orders if the buyer accepts the pro forma invoice.

Conclusion

Pro forma invoice plays a vital role in the operation of an organization. One can consider it as a first step in executing a sale transaction. Removing all confusion related to the product’s price opens up the door for a long business relationship.