What is a proforma invoice?

Invoicing is a necessary part of running a small business. They mean you can get paid for your hard work, create cash flow, keep track of your earnings and expenses, and prepare your books for tax season. But where do proforma invoices fit in?

This article will look at what is a proforma invoice, by looking at the following areas:

• What is a proforma invoice?
• How does a proforma invoice differ from other invoices?
• When should a proforma invoice be used?
• What should be included in a proforma invoice?

A proforma invoice is a preliminary bill for goods or services before they are supplied. It is basically an estimated invoice to show a customer how much the final cost will likely be. 

It will usually include a breakdown of the goods or services you’re providing, as well as an itemised list of each cost, which amounts to the total payable to you. It can also include other details about the transaction so that your customer knows as much as possible ahead of time, before committing to the payment.

For example, you may require your customer to pay you upfront, so that you have the funds to source parts or goods to supply your services. In this case, a proforma invoice would give the details of the transaction so that the customer can see exactly how much and what they are paying for before the real payment invoice is issued.

Proforma invoices will look very similar to your real invoices because they include much of the same information. They are closer to a quote than an invoice, but this quote is just in a more formal format. The customer isn’t required to pay the amount you’ve estimated on the proforma invoice and it is not legally binding, so you should not use them for accounting purposes (such as for your accounts receivable, to claim VAT, or for revenue estimates).

There are several steps on the way to invoicing, and proforma invoices are part of these stages to being paid (your final invoice). Let’s look at the different types of invoices:

You would issue a ‘quote’ for the price of your goods or services, to a customer who has expressed an interest in buying from your business. It’s a little less formal than a proforma invoice, because it is usually sent during the early stages of a sale when a customer is just making enquiries or scoping out your prices.

Both quotes and proforma invoices do not have legal obligations once the customer is issued with them. If the sale is accepted by the customer then great, you can move onto a sale invoice but if they don’t want to proceed then both quotes and proforma invoices can be easily cancelled and not taken any further.

A sales invoice is the formal request for payment that’s sent once goods or services have been supplied to the customer. In the UK, invoices are legally binding, and all invoices must be paid within 30 days of being issued, unless you have agreed different payment terms with the customer. This document is also used for tax purposes, and if you are VAT registered you can also call this a tax invoice as it will be needed as a record for your tax returns. 

A commercial invoice will be used if you deal in international shipments, and the invoice will state what items are being shipped, the customer and seller details as well as the weight and quantity of goods. This invoice will be for the customer as well as any customs officials at national borders.

If goods you sold are damaged, or potentially there has been an error in billing for your services, you can issue the customer with a credit note which acts as a receipt of refund. This can either be a cash refund that you issue, or a credit that can be used toward future purchases with your business.

There are two instances where a proforma invoice would be used:

• To create a provisional estimate of the cost of a sale. You are not requesting payment with this type of invoice, but using it as part of a negotiation, so that your customer has an accurate understanding of what your sale will cost and what will be included in it. The invoice can always be adjusted if goods or services are added, as only the final invoice will be payable.
• To ship an item internationally you will potentially need to issue proforma invoices as well as commercial invoices, so that the details such as packaging, weight, delivery fees and contents are declared to the customer and international customs before it is shipped, for a smoother delivery experience.

Proforma invoices will show the details of the proposed transaction, so it should include the same information as the final invoice:

• A unique invoice number
• Your business name, address and contact details
• Your customer’s name and address
• Date of issue and the due date
• Description of the goods
• Any applicable terms or conditions
• Payment terms (so that the customer understands what is expected once they have consented to the sale)
• VAT (Although a proforma invoice isn’t a tax invoice, you should still show what the VAT amount is expected to be if applicable)

Unlike the final sales invoice, you should also include:

• The term ‘proforma invoice’, so your client knows it’s not a final sales or tax invoice
• The phrase ‘this is not a tax invoice’ so that they don’t keep it for their records, and you don’t keep it for yours.

With the Countingup app, you can create invoices in seconds, get notifications when you’re paid, and receive automatic invoice matching so that you don’t have to worry about bookkeeping admin.  

The Countingup business current account makes it easy to manage all your financial data in one simple app. The app will give you real-time insights into your cash flow, profit and loss reports, tax estimates, and the ability to create invoices in seconds. 
You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Find out more here.