1. What is a Proforma Invoice?
A Proforma Invoice is a preliminary bill of sale sent to a buyer *before* goods are shipped or services are delivered. It outlines the description of items, the price, shipping weight, and transport charges, serving as a commitment from the seller to provide goods at a specified price and date.
The term comes from the Latin meaning "for the sake of form." Unlike a standard invoice, a proforma invoice is not a demand for payment. Instead, it acts as a formal quote or estimate that can be used by the buyer to apply for an import license, open a letter of credit, or arrange financing.
2. Proforma vs. Commercial Invoice vs. Quote
Understanding the distinction between these three documents is critical for avoiding accounting errors and customs delays.
| Document Type | Timing | Binding Status | Purpose |
|---|---|---|---|
| Quote / Estimate | Early Negotiation | Non-Binding | Rough idea of costs. |
| Proforma Invoice | Before Shipping | Good Faith Agreement | Finalizing terms, customs declaration, securing deposits. |
| Commercial Invoice | After Shipping | Legally Binding | Request for payment, tax recording, ownership transfer. |
3. When & Why Should You Use a Proforma?
You shouldn't send a proforma for every transaction. However, it is the industry standard in four specific high-stakes scenarios:
A. International Trade & Customs
This is the most common use case. Customs authorities require a document to assess the value of goods *before* they enter the country to calculate duties and taxes. A proforma invoice allows the shipment to clear customs even if the final sale hasn't occurred.
B. Letters of Credit (L/C) for Banks
In international B2B trade, banks often act as intermediaries to guarantee payment via a Letter of Credit. Banks will almost always require a formal Proforma Invoice from the seller to open an L/C for the buyer. The Proforma acts as the proof of the deal's terms.
C. Securing Advance Payments (Deposits)
If you require a 50% deposit to start a project or manufacture goods, you cannot issue a final tax invoice for the full amount yet. A proforma invoice acts as the formal request for this deposit without triggering a tax event for the full value on your books.
D. Internal Approval (Corporate Clients)
Large corporate clients often cannot issue a payment without a Purchase Order (PO). Their Accounts Payable department will use your Proforma Invoice to authorize the budget and generate that internal PO number.
4. Why Excel Templates are Risky for Proformas
Many businesses still use static Word or Excel templates for Proforma Invoices. This creates significant risks, especially regarding validity dates and disclaimers.
| Feature | Excel / Word Template | Our Proforma Generator |
|---|---|---|
| Validity Date | Often forgotten or static | Mandatory Field (Protects your pricing) |
| Disclaimer | Manual copy-paste | Auto-Inserted ("Not a VAT Invoice") |
| Calculations | Prone to formula errors | 100% Accurate Auto-Calculation |
| Format | Editable (Can be altered) | Secure PDF (Professional & Locked) |
5. Anatomy: What Must Be Included?
To be valid—especially for customs—a proforma invoice must be precise. Our Proforma Generator includes these fields by default:
- Clear Heading: Must be labeled "Proforma Invoice" or "Performa".
- Validity Date: A "Valid Until" date prevents you from being locked into old prices if costs rise.
- Party Details: Full names and addresses of Buyer and Seller.
- Description of Goods: Quantity, unit of measure, weight, and unit price.
- Shipping Terms: Incoterms (e.g., FOB, CIF) and estimated delivery date.
- Disclaimer: A statement such as "This is not a VAT invoice."
6. How to Create a Proforma Invoice (Step-by-Step)
Follow this workflow to create a risk-free proforma document that converts to a sale.
Start with the Right Template
Don't just rename a standard invoice. Use a specific Proforma template that removes tax demand language and adds validity dates.
Set the Validity Date
Prices for raw materials or currency exchange rates fluctuate. Set a validity period (e.g., 30 days) to limit your risk.
Itemize & Estimate
List the goods/services as accurately as possible. If costs are estimates, mark them clearly. Include shipping weights for physical goods.
Add the "No-Tax" Disclaimer
Ensure the document states: "This is not a tax invoice. A final VAT/GST invoice will be issued upon delivery/payment."
Convert to Final Invoice
Once the client accepts or pays the deposit, open your tool and simply change the type from "Proforma" to "Invoice" to finalize the deal.
Is your Proforma approved?
If your client has accepted the quote and you are ready to ship, you need to issue a Commercial Invoice for customs.
7. Frequently Asked Questions
Is a proforma invoice legally binding?
Can I use a proforma invoice for accounting purposes?
Can I use a proforma for a Letter of Credit?
Disclaimer: The information provided in this guide is for educational purposes regarding standard business practices. It does not constitute legal, tax, or customs advice. Regulations regarding proforma invoices vary by country. Always consult a qualified accountant or customs broker for specific transactions.