In Latin, pro forma is defined as "for the sake of form," implying that it is only a provisional document that an official document will follow. Although proforma invoices are commonly used, they are easily confused with regular invoices.
What is a Proforma Invoice?
A Proforma Invoice is a preliminary bill sent to a buyer before a sale is finalized. This invoice summarizes the seller's deliverables, such as the items or services to be delivered, shipping information, prices, and delivery date. So, after reviewing the proforma invoice, the buyer gives the seller the go-ahead. The seller then sends a sales invoice and begins working on their end of the bargain—manufacturing the goods or providing the service(s).
When should I issue a Proforma Invoice?
A proforma invoice is issued when the seller has discussed the preliminary details of a sale with the buyer but cannot send an official invoice. This could be because the buyer has not yet confirmed the final details of the deal. A proforma invoice can inform the buyer exactly what to expect from the seller.
A Proforma Invoice use case:
Assume Larry Components, a computer parts manufacturer, receives an order for 1,000computer monitors. Larry Components begins procuring materials for the monitors and manufacturing them immediately after receiving the order, without any negotiation or confirmation. Larry Components forwards an invoice to the buyer after the manufacturing is completed in a month. The buyer is dissatisfied with the invoice because:
● They think the price is too high and could have been negotiated;
● They wanted the delivery date earlier;
● They want longer payment terms.
Larry Components can still make amends by lowering its prices, rushing to meet deadlines, canceling its previous invoice, and creating a new invoice that meets the buyer's requirements. However, doing business in this manner is chaotic and inefficient.
Assume Larry Components generates a proforma invoice that includes the price of the computer monitors, the delivery date, and the payment terms. Now the buyer can negotiate with the seller to reach mutually beneficial terms. Larry Components sends a proforma invoice as a good faith document and begins manufacturing the computer monitors after the parties agree. When the manufacturing is finished, the proforma invoice can be converted into a sales invoice with the help of invoicing software or an accounting tool.
Why do businesses use Proforma Invoices?
A Proforma Invoice is used for the following reasons.
● Informing the buyer about what to expect from the supplier and inviting negotiation;
● To demonstrate the supplier's willingness to provide the goods and services at the agreed-upon price and on the agreed-upon date;
● Recognize the buyer's acknowledgment and intent to pay;
● To speed up the quote-to-cash process;
● To serve as a quote for the buyer's internal purchase approval protocols;
● To reduce processing time and costs.
Sending a Proforma Invoice with a tentative summary of the deal before confirming the sale streamlines the quote-to-cash process and allows the buyer to review the terms of the deal before it is made. Businesses that are rapidly expanding and seeking to improve their billing processes should strongly consider using Proforma Invoices. Such invoices can be easily generated online via Invoice Builder.