Proforma invoice: when should small businesses use them?

Running a business comes with many challenges, not least managing the accounts and payment for your goods and services. A proforma invoice is a way to ease the transactions between you and your customers and suppliers.

This article explains the differences between a proforma invoice and an invoice, when you might use one, and how it can help you run your business.

What is a proforma invoice?

Think of a proforma invoice as a type of quote, it’s not legally binding but instead gives your customer a more accurate picture of what’s going to be delivered.

An invoice is issued after the delivery of goods or services. On the other hand, a proforma invoice is issued before. It includes most of the same information as a regular invoice but has a few minor differences.

When should you use a proforma invoice?

Usually proforma invoices are used to provide a customer with a detailed overview of a purchase and its final cost before they commit to buying.

Quotes are typically sent in the early stages of a sale and are rough estimates, while proforma invoices are more accurate costings that are sent just before the purchase.

For example, a builder gets a request from a customer for an extension on their house and quotes a price. Before the builder begins the work, they send a proforma invoice to agree on the final price. When the work is complete, they send the final invoice.

Small businesses can use proforma invoices when they start working with a new supplier. It can introduce elements of your process to them like your payment terms and pricing.

Proforma invoices for international trade

If you’re regularly shipping your products internationally, a proforma invoice can be useful for many reasons. Because of the complex logistics involved in international shipping, having key pieces of information in one document can help things run smoothly.

Proforma invoices provide shipping agents, freight forwarders, and carriers with details they need to know like the shipping addresses and terms.

It also informs customs workers of the contents, price, and country of origin of the order – which is crucial for them to process the delivery.

There are different laws regarding imports and exports in every country. Making this information easily accessible means you can reduce the risk of fines or delivery delays.

Requesting a proforma invoice

As well as sending them to customers, you can also request them from suppliers. There are things you can learn about their process and expectations from a proforma invoice, for example:

• cost estimation – you can better understand how much the final price will be, taking into account any additional charges
• terms and conditions – a proforma invoice includes details like payment terms and delivery timelines that you wouldn’t know until purchase
• budgeting – getting a better sense of the cost before committing to buying can help you stay within budget and have a more accurate cash flow forecast
• comparison with other suppliers – if you’re trying to decide between potential suppliers, you can use a proforma invoice to get a more precise comparison of price and payment terms

How to write a proforma invoice

A proforma invoice is almost the same as a regular invoice but with a couple of small differences.

Like a regular invoice, your proforma should have:

• a unique invoice number
• company name, address and contact details
• your customer’s name and address
• date the invoice was issued
• the due date for payment
• a summary of the goods
• how long the price will be valid
• a link to your terms or conditions
• your payment terms (it’s worth giving them instructions on how they’ll pay even if they’re not ready to purchase)
• VAT (you should still show the VAT amount is expected to be)

But two features that are important to include on a proforma that won’t be on a regular invoice are:

• the term ‘proforma invoice’ where you would usually write invoice

• the phare ‘this is not a tax invoice’ so both parties don’t accidentally include it in their tax return

If you use an accounting software provider (we’ve listed some of the best-rated) then you can use a proforma invoice template to make things simple.

The benefits of a proforma invoice for SMEs

There are benefits for small businesses to send and receive proforma invoices. When you send someone a proforma invoice, you're giving them a clear indication of how much your services will cost, your delivery schedule, and your payment terms.

It can bring clarity to your process so that by the time the transaction is complete, your customer knows exactly what to expect.

And this works both ways. Requesting a proforma invoice from someone else can give you all the information you need to confidently complete the sale.

More useful guides for small businesses

• How can businesses avoid chargebacks?
• Credit control – how to protect your finances
• Best business savings account
• How much is business insurance?

Is there anything else you want to know about issuing a proforma invoice? Let us know in the comments below.