A proforma invoice (sometimes written as pro forma invoice) is little more than a ‘preadvice’ or indication of what will stand in the commercial invoice once negotiations have been completed. Indeed, the proforma invoice and the commercial invoice often look exactly the same, except that it should state clearly “proforma invoice” on this document, whereas the commercial invoice will state “invoice” or “commercial invoice”. The proforma invoice serves as a negotiating instrument. The initial proforma invoice often sets the stage for the first round of negotiations if the exporter and importer have not yet had any real discussions.
What is the difference between a proforma invoice and a quotation?
In reality, there is very little difference in function between the two and the proforma invoice is really a quotation in invoice form; in other words. the difference really comes about in terms of the structure and layout of the proforma invoice/quotation. A typical quotation appears more like a business letter describing a written offer, while a proforma invoice appears exactly the same as a invoice (except with the words “proforma invoice” written on the document). The proforma invoice essentially serves as a ‘quotation’ that sets the road to further negotiations. Some exporters choose to prepare an ‘official’ quotation, while others prefer to use the proforma invoice as their quotation. In fact, the quotation can contain the same information as a proforma invoice. Sometimes a firm may send out a written quotation and the importer may ask for a proforma invoice. It is important to note that there is no standard format for the proforma invoice and one proforma invoice may differ redically in layout from the next (although there is common agreement on the information that should be included in the coument). It is a document prepared by the exporter and so will take the format/layout decided on by the exporter. To help you, we provide some examples of proforma invoices:
You need to do a lot of homework before preparing your pro-forma invoice
You need to ensure that the information that you include in your proforma invoice is sufficiently accurate and realistic, as well as being comprehensive enough to cover all the issues of importance to the importer. This will enable him or her to make an informed decision to buy from you. Remember, the proforma invoice is your offer to sell – it reflects on you. Based on this one single document, the importer will need to come to a decision to buy from you or not. If you do not provide sufficient information, or any crucial information is lacking, the importer (if you are lucky) may have to revert back to you and ask you to provide this information – this will delay the purchase decision and may result in you incurring additional costs (for example, you may have stock sitting around longer than it needs to because of the delay). Worse still, the importer may ignore or reject your offer and buy from someone else. In fact, it is quite a common problem in exporting that proforma invoices often lack the crucial detail that the importer needs in order to make a decision, thereby resulting in delayed purchase decisions or rejection of the offer altogether.
To this end you should use a costing worksheet to calculate your export costs and to determine an acceptable price. ExportHelp has compiled a comprehensive costing worksheet that you can use to help you determine your costs. Click here to access this costing worksheet.
The proforma invoice sets the stage for the negotiation process
Assuming that an importer e-mails you – an exporter – asking you to submit a proforma invoice (or a quotation) for the supply of 100 pumps according to a set standard. You would then prepare and submit a proforma invoice to the potential importer outlining a description of the product, what the price is, what the delivery terms will be, what the payment terms will be, as well as any other information that may be pertinent to the sale. Before this, of course, you will have done the costing exercise mentioned above. The importer will most likely reply to your proforma invoice requesting/negotiating different requirements such as a lower price, longer terms of payment, different methods of payment, a different delivery schedule and may even request changes to the product specifications. You may be required to revisit the design and manufacture of your product, the costing exercise mentioned earlier, as well as you pricing strategies. You may even have to find alternative ways of getting your product to the customer and you may need to carefully rethink issues such as packaging, labelling, insurance, commissions, etc.
Several versions of a proforma invoice may be involved
Based on these requests from the importer, you may choose to comply or to refer back to the importer (probably via telephone, fax or e-mail) to discuss or negotiate compromises to these requirements. When you and the importer finally come to an agreement, a second (sometimes even third or fourth) proforma invoice will be exchanged between the two parties. This final proforma invoice – accepted by the importer – sets the stage for the further processing of the order. You should be aware that the importer may use the proforma invoice to request foreign exchange within his/her country if his/her currency is not freely convertible. The proforma invoice can also help the importer apply for a letter of credit at his/her bank.
The proforma invoice must be comprehensive, accurate, clear and concise
In other instances where the exporter and importer have met before and have already discussed and thrashed out an agreement perhaps in a face-to-face meeting, only one final proforma invoice is necessary to confirm that the two parties are indeed in agreement. If the importer is satisfied with this final proforma invoice, he/she will request their bank to issue an L/C on the strength of information stipulated in the proforma invoice. For this reason, it is essential that the proforma invoice be comprehensive, accurate, clear and concise. Any errors or misunderstandings will be transferred to the L/C and will cause problems, frustrations and delays down the line. What is more, the proforma invoice is also important to the importer for the purpose of obtaining an import permit and foreign exchange allocation within his country. At the same time, the exporter may use the proforma invoice and acceptance of the order from the importer to obtain funding to pay for the manufacturer of the goods concerned.
Why use a proforma invoice?
In summary, the proforma invoice is a popular document in exporting because:
- It is a widely accepted form of sales offer in the global export community.
- It clearly outlines all of the relevant information required to enable an export purchase decision to be made by the importer
- It is a legal document, which if accepted by the importer is considered the basis of a binding agreement
- Banks and other financial institutions will commonly accept proforma invoices in order to establish a Letter of Credit on behalf of the importer
- The commercial invoice is almost identical to the proforma invoice (except for the title) and is thus easy to prepare, thus minimising the possibility of errors.
Details pertinent to the proforma invoice
The following details are pertinent to the setting up of the proforma invoice and need careful attention:
- The document title should clearly state “Proforma Invoice”
- The name of the exporter (referred to as the shipper) and their contact details (tel, fax, cell, e-mail), including physical (not postal) address
- The name of the importer (referred to as the consignee, meaning the person or firm to whom the goods are to be sent) and their contact details (tel, fax, cell, e-mail), including physical (not postal) address (In the case of transshipment, there may be an intermediate consignee and their contact details and address should then also be included on the invoice.)
- If the person or firm buying the goods (the importer) is not the same as the person or firm to whom the goods are being sent, then you should include both their contact details and addresses in the proforma invoice
- The name of the person and company to notify once shipment has taken place and their contact details and physical address (here the contact details such as telephone, fax and cell number and e-mail address are more important than the physical address)
- A proforma invoice reference number
- An order number or similar reference to correspondence between the supplier and importer
- The date of issue of the proforma invoice (the ‘quotation date’) – quite important
- A complete, detailed and clear description of the goods in question, incorporating the appropriate HS codes and brandmarks if applicable (here the importer may ask you to remove these codes as they may not be the same in the importing country and may thus incur additional or higher duties to the importer’s detriment because of their inadvertent misuse)
- The quantity of goods in question, including the number of units/items
- The packing details, including their external dimensions, cubic capacity, weight, numbers and contents of each package shipped, and kinds of packaging involved (pallets, boxes, bags, etc.)
- The grand total price of the goods for the whole consignment
- Where applicable, the unit prices should be indicated – the unit price multipled by the number of units/items should be reflected in the line total. The various line totals (in the case where different items are included in the same commercial invoice, or where additional services are itemised in the invoice), should add up to the total price for the whole consignment (also referred to as the ‘Grand Total’)
- The currency in which the goods will be sold (e.g. US dollars or rands)
- The type and amount of any discount given, where applicable
- The likely delivery schedule and delivery terms
- The payment methods (for example cash in advance, documentary collection, L/C, etc.)
- The payment terms (for example 30 days on sight)
- The Incoterm to be used (Incoterms 2000 – FAS, CIF, CFR, DDP, etc.)
- Who is responsible for the banking fees and other related costs (insurance and freight costs are covered by the incoterm in question)
- What the freight and insurance charges are
- The exporter’s banking details
- A declaration of the country of origin of the goods
- The expected country of final destination
- Any freight details such as the port of loading and discharge
- Any additional exporter-provided services that should be added to the invoice to come to the grand total
- Any transhipment requirements
- The validity of the proforma invoice – that is, when does the offer expire (leaving it open-ended could be very risky)
- Any other information relevant to the order
- Make sure the proforma invoice is signed, together with the signature’s name written underneath, with initials, title and position