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What Is a Pro Forma Invoice and How Do I Use It?

If you want to foster sound accounting practices in your business, knowing how to use different types of invoices correctly is important. One of the trickier invoicing concepts that some small business owners struggle with is the pro forma invoice. Here’s a quick investigation into pro formas’ meaning and how you should be using these types of invoices in your business.

In this article, you will learn:

·         The difference between quotes, pro forma invoices, and invoices.

·         When to use a pro forma invoice.

·         What your pro forma invoice template should look like and where to find invoice software.

·         How pro formas impact your bookkeeping.

What Is a Pro Forma Invoice?

What does “pro forma” mean, exactly? The term itself comes from Latin and means “for the form.” An invoice that is “pro forma” is by definition one that has been created “for the sake of form.”

So why might you want to create an invoice for the sake of form only? Well, a true invoice has a certain finality to it. It is a legal contract issued by a seller to a buyer after the buyer after goods or services have been received. Put simply, it is the document that customers will use to pay your bill.

A pro forma invoice is more of a draft invoice. It is created to give customers who have expressed the intent to buy from you a detailed, good faith estimate of what their total cost will be when the sale becomes final.


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Pro Forma Invoice vs. Commercial Invoice vs. Quote

Think of quotes, pro forma invoices, and invoices as existing on a continuum from not legally binding to non-negotiable and binding.

A quote is a cost estimate for something your potential customer has a mere interest in buying. It doesn’t obligate them or you in any way.

A pro forma invoice is a more formal than a quote but more casual than a true invoice. It is for customers who intend to buy, before the sale has been finalized. It commits you to selling at a stated price and is a precursor to a legally binding agreement between you and the buyer.

An invoice, on the other hand, is legally binding. However you define “invoice,” at the end of the day it is a bill. An invoice exists because products have been delivered or services have been rendered. Now the customer has an obligation to pay.

A commercial invoice is used in import and export situations. It is a detailed customs document that proves that duty has been paid.

When to Use a Pro Forma Invoice

Use a pro forma invoice to create a potential sale and an invoice to confirm that one has been executed. Sometimes it is necessary to create a provisional bill of sale before your product or services have been delivered, with a precise price quote, shipping cost, and taxes. Pro forma invoices are often used when shipping items internationally because they provide all the detail that is needed for the shipment to clear customs before delivery.

Once your products or services have been received, you can easily modify your pro forma to create a final invoice.

How to Create a Pro Forma Document

A pro forma invoice should include most of the elements of a true invoice, including:

  • The date the invoice was issued

  • The contact details of both the buyer and the seller

  • Product or service details and the agreed prices for them

  • Taxes

  • Shipping costs, if any

  • The total

  • Any terms of credit that can be expected

The words “pro forma” should appear clearly on the document so the customer knows it is not a demand for payment yet.

Because the document issued is not legally binding, there is no need for an invoice number, the exact date of delivery, or payment terms (e.g. payment in 30 days). All you will need to do to transform your pro forma into a true invoice post-delivery is to add those things in and modify the date of issue.

Where to Find a Pro Forma Invoice Template

Pro forma invoice templates abound online. You can find free templates through:

·         An Office 365 subscription

·         Accounting software providers like FreshBooks and QuickBooks

·         Free downloadable template sites like InvoiceSimple

Because pro forma invoices and for-payment invoices are almost identical, you may be able to easily alter your current invoice template and simply label it “Pro Forma Invoice.”

Pro Forma Invoices and Financial Statements

A parting word of caution: Since pro formas are not legally binding, they should not appear in your accounts receivable calculations (or your customer’s accounts payable calculations). You wouldn’t want to make the rookie mistake of throwing your balance sheet and your cash flow projections off kilter by including money that isn’t yet legally due to you yet.

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Want to learn more small business fundamentals? Read about free tools, how to accept credit card payments, and getting ready to launch.

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Catherine Traffis