Today, I will answer all questions you have been asking about another important import document – pro forma invoice.
You’re going to learn everything including what it is, the content, how it works, who issues the document, its purpose, among other important aspects.
Keep reading to learn more.
- What is a Pro Forma Invoice?
- Why do you need Pro Forma Invoice when Importing from China?
- What is the difference between Invoice and Pro Forma Invoice?
- Can you Pay Chinese Suppliers on Pro Forma Invoice?
- Can Pro Forma Invoice be cancelled when Importing from China?
- How do Pro Forma Invoices Work?
- How does Pro Forma Invoice vs Commercial Invoice Compare?
- Can you use Pro Forma Invoice for Advance Payment?
- How does Pro Forma Invoice vs Quotation Compare?
- Who Issues Pro Forma Invoice when Importing from China?
- Is there Specific Format for Writing Pro Forma Invoice?
- How do you Prepare Pro Forma Invoice?
- What is the Content of Pro Forma Invoice?
- Can you use Pro Forma Invoice to Pay for Imported Goods from China?
- Is there Standard Format for Pro Forma Invoice?
- Should Pro Forma Invoice include VAT?
- What is the Difference Between Purchase Order and Pro Former Invoice?
- What comes First – Purchase Order or Pro Forma Invoice?
- Does Pro Forma Invoice have a Number?
- Who Signs the Pro Forma Invoice?
- What are the Best Practices when Creating a Pro Forma Invoice?
- When should you use a Pro Forma Invoice?
- What is the Validity Period of a Pro Forma Invoice?
- Is a Pro Forma Invoice Legally Binding?
What is a Pro Forma Invoice?
A pro forma invoice is a shipping document that is sent by the seller to the buyer before the shipment of goods commences.
This document describes the items being purchased together with any other information regarding the shipment and payment of the goods.
Not forgetting that it also helps in calculating the cost estimates of your shipment.
Why do you need Pro Forma Invoice when Importing from China?
Sample pro forma invoice
There are several reasons as to why a pro forma invoice would be quite necessary when importing from China.
Some of the reasons why most importers use a pro forma invoice when importing from China include;
- Calculating cost estimates – When importing from China, a pro forma invoice will help in coming up with cost estimates of the shipment.
- A pro forma invoice facilitates smooth operations when goods are passed through customs.
- With a pro forma invoice, you can easily change your order if the need arises. You will only be required to update and convert your pro forma invoice into a full invoice.
- A pro forma invoice comes in handy in times when you are lacking the full details for a commercial invoice.
- Additionally, a pro forma invoice will help boost your profits as a business.
- A pro forma invoice also acts as a binding agreement ensuring that buyers know what they’re committing to.
- When importing from China, some financial institutions might use a pro forma invoice to open the letter of credit.
- A pro forma invoice is important in examining and reducing errors as the terms are clearly outlined.
- Not forgetting that a pro forma invoice forms a basis for bookkeeping as well as accounting.
- A pro forma invoice declares the value of the goods for customs which in turn helps speed up the payment process.
What is the difference between Invoice and Pro Forma Invoice?
A pro forma invoice refers to a trade document provided by the seller to the buyer giving clear information on what the buyer should expect from the sale.
In simple terms, a pro forma invoice states the quotation before you make your order.
On the other hand, an invoice serves as a proof of sale between the buyer and the supplier outlining the total amount to be paid.
An invoice will be issued after your order has been cleared.
Can you Pay Chinese Suppliers on Pro Forma Invoice?
No, you can’t.
A pro forma invoice is primarily used to clarify or establish the terms of a particular order and cannot be used for payment or accounting purposes.
However, there are several other payment methods that Chinese suppliers accept such as PayPal, wire transfer, and telegraphic transfers among others.
Can Pro Forma Invoice be cancelled when Importing from China?
No, it cannot be canceled.
However, you can choose to change the status of the same.
A Pro forma invoice doesn’t have any impact on accounting and therefore cannot be canceled.
Cancellation can only apply to account documents.
How do Pro Forma Invoices Work?
A pro forma invoice is a bill of sale sent by the seller to the buyers before the delivery of goods.
It is meant to ensure an efficient sales procedure.
Before you understand how a pro forma invoice works, let’s first have a quick look at contents of a pro forma invoice;
- The Payment terms
- The total amount due
- Reference number
- Buyers and seller’s contact details
- Country of origin
- The incoterms applicable
- All taxes including VAT
- Date of issue
- Signature and the title
- The unit pricing
- Description of the goods
After the seller sends the pro forma invoice, the buyer goes through it and decides whether or not he agrees to the invoice.
This includes the price indicated, the quantity of goods to be delivered together with any other inclusions contained in the pro forma invoice as stated above.
In as much as it includes cost details, a pro forma invoice does not demand payment of goods.
Its main purpose is to streamline sales operations as all terms are agreed upon upfront.
After the buyer is satisfied with the pro forma invoice, he or she issues a purchased order to the seller, and thereafter the sales process begins.
How does Pro Forma Invoice vs Commercial Invoice Compare?
Pro forma invoice and commercial invoice are two important documents in the import and export industry when dealing with any type of client.
One of the most asked questions is whether or not these two are the same. The answer is no.
A pro forma invoice and commercial invoice differ in a manner that;
Pro forma invoice is issued before the commencement of sales whereas a commercial invoice is issued after the acceptance of the sales contract.
To gain a better understanding of the two, here is a brief description.
Once a buyer shows interest in making a purchase, the seller sends him or her a pro forma invoice.
The invoice is meant to give the buyer a clear understanding of what he or she should expect.
After going through the pro forma invoice and accepting the terms stated, the buyer sends a purchase order or letter of credit to the seller.
It’s at this moment that the sales process begins as per the date stated in the pro forma invoice.
A commercial invoice prepared by the seller is sent to the buyer for the confirmation of sales made.
The contents of both the pro forma invoice and commercial invoice are more or less the same.
Nevertheless, the price might differ because the price stated in the pro forma invoice is not final.
Can you use Pro Forma Invoice for Advance Payment?
Yes, you can.
A pro forma invoice can be used to serve as a request for payment of goods that haven’t been sold yet.
In addition to that, it speeds up the payment process as the buyer is aware of what he owes to the seller.
How does Pro Forma Invoice vs Quotation Compare?
In as much as a pro forma invoice and a quotation might appear to serve the same purpose, they are different from each other.
A quotation refers to a document sent to the buyer detailing the goods needed together with their estimated costs.
On the other hand, a pro forma invoice is issued before the sales process and its main purpose is to give a clear outline of what the buyer should expect.
As compared to a pro forma invoice that shows commitment to a particular purchase, a quotation is normally sent in case of any inquiries.
Who Issues Pro Forma Invoice when Importing from China?
A pro forma invoice will be issued by your Chinese supplier.
They are responsible for preparing and sending you the pro forma invoice.
Sample pro forma invoice
Is there Specific Format for Writing Pro Forma Invoice?
Yes, there is.
Pro forma invoices have a specific format.
Preparing a pro forma invoice has been made simpler by the availability of several pro forma invoice templates as well as software.
Depending on your choice and preferences, you can choose one that is suitable for your business.
How do you Prepare Pro Forma Invoice?
The presence of several templates online has facilitated easier and faster preparation of pro forma invoice.
Once you download a template that best suits your needs or rather business, the next step will be to fill in your pro forma invoice.
First, fill out your contact details and business name.
You can also choose to customize it using your business logo.
Also, fill out your clients’ contact details, name, and business information.
Thereafter, include the payment due date, a unique invoice number as well as the invoice date.
Make sure that you have all the goods and services listed together with their costs.
Finally, do a calculation of the total costs and include them at the bottom part of your invoice.
Ensure that you have added the payment terms as well as any other additional information and specify that the pro forma invoice is “not a VAT invoice”.
Having done all these, your pro form invoice is ready to be sent to your buyer.
What is the Content of Pro Forma Invoice?
A pro forma invoice has a couple of contents that must not be omitted at any given time. Some of these contents include;
Content of Pro Forma Invoice
- The contact details of both the buyer and seller
- The terms of payment
- A full description of the goods in question
- The total amount due
- The date of issue
- Country of origin
- The seller’s banking details
- The unit pricing
- Incoterms applicable
- The reference number
- Signature and the title
- The validity of the pro forma invoice
- Al taxes applicable including the VAT
Can you use Pro Forma Invoice to Pay for Imported Goods from China?
No, you can’t.
Keep in mind that a pro forma invoice is not an actual invoice, it’s a “dummy” invoice.
Therefore, it’s not suitable and cannot be used for accounting purposes.
Is there Standard Format for Pro Forma Invoice?
No there isn’t.
A pro forma invoice can take different formats based on the seller’s preferences.
The different formats available are designed to suit different functions such as retail, services, as well as contract pro forma invoices among others.
Should Pro Forma Invoice include VAT?
Including VAT in a pro forma invoice is not mandatory.
However, including it in your pro forma invoice attracts other benefits such as;
- Creating awareness about the total amount to pay which in turn prevents any form of misunderstanding about the costs later on.
- Including a VAT will make it much easier and faster for you to convert the pro forma invoice into an invoice. To achieve this make sure that you make use of the same template.
What is the Difference Between Purchase Order and Pro Former Invoice?
A purchase order (PO) refers to a commercial trade document prepared and issued by the buyer to the seller to show interest in the purchasing of goods.
Once the supplier or seller receives the purchase order, he or she sends a pro forma invoice to the buyer.
The pro forma invoice states what the buyer should expect in terms of payment, delivery, and description of the goods among others.
What comes First – Purchase Order or Pro Forma Invoice?
A purchase order comes first followed by the pro forma invoice.
Remember a pro forma invoice is sent after the buyer sends a purchase order which shows the buyer’s interest in buying goods.
Does Pro Forma Invoice have a Number?
No, it doesn’t.
Invoice numbers are only held in reserve for finalized or completed invoices.
Who Signs the Pro Forma Invoice?
A pro forma invoice is signed by the buyer once he or she accepts the terms in the pro forma invoice.
Thereafter, the buyer submits the pro forma invoice together with a purchase order to the supplier.
What are the Best Practices when Creating a Pro Forma Invoice?
When creating a pro forma invoice you need to make sure that it is effective.
By this I mean, it should be easily understood, and be straight to the point.
To achieve this;
- As a buyer, ensure that you don’t mark the pro forma invoice as account payable. Keep in mind that the pro form invoice is only meant to clarify what you should expect and that you haven’t made any purchases yet.
- Including the dates is an important factor to remember as prices of goods and commodities fluctuate from time to time.
- As a seller, you should not mark the accounts as receivable as you are yet to make any sales.
When should you use a Pro Forma Invoice?
Pro forma invoices are important for most if not all types of businesses involved in buying goods and services.
Here are some instances that will prompt the use of a pro forma invoice;
- When acquiring import permits.
- A pro forma invoice can be used when paying for custom duties.
- Additionally, you can use it when opening a line of credit for a particular purchase.
Not forgetting that Pro forma invoice is applicable in most industries not excluding; manufacturing, import/export, wholesalers as well as trading industries among others.
What is the Validity Period of a Pro Forma Invoice?
The validity period of a pro forma invoice varies from one business to the other.
The validity is as stated on the pro forma by your supplier.
Is a Pro Forma Invoice Legally Binding?
A pro forma invoice lacks legal validity and therefore it is not legally binding to either party.
It is used to highlight the terms of sale once an order is made.
I hope you this guide did answer all your questions on pro forma invoice.
In case you have any additional questions, BanSar team is here to help.