Selling something on consignment? Thinking about getting into the import/export business? Looking for a convenient way to standardize the way you send quotes? It might be time to incorporate proforma invoices into your invoicing system.
Here we’ll go over what proforma invoices are, what they look like, when you should use them, and how they’re different from other purchase forms.
What is a proforma invoice?
A proforma invoice is a document sent by a supplier to a buyer to tell them the estimated price of the goods and services they want to buy. It’s more formal than a quote, but not as formal or final as a true invoice.
“Proforma” means that something is a “formality,” i.e. provided as a courtesy. Proforma invoices are sent as a courtesy to the buyer: they’re purely informational and non-binding. Unlike a contract, professional invoice or a purchase order, a proforma invoice is not considered a legal document.
When do people use them?
A seller will send a proforma invoice whenever a buyer is interested in purchasing—but has not yet purchased—their goods or services. It shows the total value of goods the buyer could buy.
Proforma invoices are mainly used in situations when a supplier will sell on consignment.
This happens when a consigner (a factory in Poland, for example) sends a consignee (a screen printing business in the United States) some goods to sell, along with a proforma invoice. Under a consignment agreement, a consignee doesn’t pay for the goods they receive until they sell them. Once they do, the consigner will send along a final invoice to finalize the sale.
Because a lot of international trade operates on a consignment basis, this is why you’ll often see import and export businesses using proforma invoices. (Attaching a proforma invoice to an international shipment is usually much more convenient from a customs perspective.)
What’s the difference between a regular invoice and a proforma one?
Proforma and regular invoices can be very similar, depending on how your accounting software works. Like a regular invoice, a proforma invoice will list important sales information like unit price, quantity and the seller’s contact information.
A big difference is that the information on a proforma invoice is temporary and subject to change. The prices listed might not be the prices charged during the final sale, the total amount isn’t necessarily the amount the seller will pay, and the payment terms might not be the same.
Proforma invoices might specifically omit all or some of the following information:
- Payment due date
- Payment terms
- Info related to accounts
- Invoice number
- Order number
- Item number
- Final rates
Proforma invoice example
Most online invoicing software (like Freshbooks) comes with proforma invoice templates built in. They might look like this example proforma invoice, sent by the fictional Pro Roastica Coffee LLC to another fictional business, Black Cat Cafe Inc.:
How are they different from other purchase forms?
You might be wondering how proforma invoices differ from all other kinds of documentation that buyers and sellers will send to each other. Here are the crucial differences:
Proforma invoice vs. purchase order
The biggest difference is that a proforma invoice is purely informational, while purchase orders are legally-binding contracts that confirm the purchase of a specific good or service.
If you want to give someone a quote for a purchase, send them a proforma invoice. If you want them to send you a cheque for goods or services you’ve already delivered, send them a purchase order.
Proforma invoice vs. sales receipt
A sales receipt proves that a payment has been made, while a proforma invoice doesn’t prove anything—it just quotes a potential future purchase price. Proforma invoices are sent before a purchase is made, while sales receipts are sent after a purchase is made.
Proforma invoice vs bill of sale
The big difference here is that a bill of sale officially transfers ownership over specific goods from one person to another, while a proforma invoice doesn’t, even if you’re selling on consignment. If you’re in a consignment agreement with someone, the goods still belong to the consigner (see above for more on consignment selling).
Proforma invoice vs letter of credit
Sometimes a bank will send a letter of credit to a seller on a buyer’s behalf guaranteeing that the seller will receive payment for goods or services on a particular day. It’s maybe the furthest you can get from a proforma invoice, which doesn’t promise or guarantee anything.