Pro Forma Invoice

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 the 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.

It is important to note that a pro forma invoice sample is not a legally binding document like a commercial invoice. It is only meant to give the buyer a basic idea about the products or services and the costs that could be incurred. However, the buyer must sign and return the document in question to ensure they have received the information.

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.

The seller issues a non-binding document using their pro forma invoice template 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 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.

Despite the fact that there is no fixed pro forma invoice template that can be followed, the following data points make it easier and concise for both parties involved in the agreement.

• 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 their per unit price 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.

Let us understand the process from beginning to end through discussing the creation of a pro forma invoice sample. This will help us understand the concept in depth.

Let us take the help of a couple of examples to understand the intricate details of a pro forma invoice template.

Example #1

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.

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 –

Example #2

John Richard Bracken, a resident of Gisborne in New Zealand was convicted of the largest tax fraud in the country’s history. The scam was worth over $122 million.

Bracken would send pro forma invoices to multiple companies and create fake commercial bills. Whereas the companies would never hear from Bracken again.

As a result, Bracken Enterprises Ltd. received $17.4 million in Goods and Services Tax (GST) refunds, which they were not entitled to receive.

An employee of Bracken Enterprises contacted the Serious Fraud Office after she suspected that legal invoices that were being created might not be legit.

Upon inquiry and investigation, it was found that the company had exported goods worth just $478,000 between 2011 and 2018 against the millions of dollars worth of sales they fabricated on paper.

It is an essential process for an organization. A pro forma invoice sample is created 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 payments towards the sale if the buyer accepts the invoice.
• It can also be used in export and import business.

As we discussed several times in the article, it is a document issued before any tax invoice is issued. Therefore, it is important to sort the pro forma invoice template for the following reasons.

• 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.

Let us understand the fundamental difference between the pro forma invoice template and an invoice through the comparison below.

Despite the fact that there is only a thin line of difference between the two concepts, they are two different documents and it is important to understand the difference to completely understand the pro forma invoice sample concept. Let us discuss the differences through the comparison below.

This article has been a guide to Pro Forma Invoice & its meaning. Here we explain its examples, how to create, process, and compared it with invoices and quotations. You can learn more about financing from the following articles –

• Invoice Discounting Meaning
• Invoice Financing
• Blank Invoice Template in Excel
• Accounting Excel Templates
• Direct Credit