An invoice may appear like a direct concept. It’s a document that declares a sale’s terms between a seller and a buyer. Nevertheless, small businesses need to handle different kinds of invoices that have a variety of purposes. Knowing the differences will help you make an effective account payable workflow and abstain from committing mistakes, like violating rules or paying an invoice twice. One such aspect is understanding proforma invoices and how they’re different from regular invoices.
What are Proforma Invoices?
Proforma addresses invoices that you’ve not yet finished, which implies that the invoices do not have an invoice number that you need for all legal invoices. Unlike invoices, a proforma invoice is a quote or an estimate that describes the products and services that a seller sells.
You send proforma invoices before you finish a project or deliver products. This document’s purpose is to make sure the buyers and sellers are on a similar page regarding the agreement, incorporating the costs of products and services. It offers promising clients a detail of the price of goods and services. It’s important to understand the difference between a proforma invoice and a regular invoice as there are several types of records that you can keep as a business.
Proforma Invoice vs. Invoice
You can discuss the key differences between an invoice and a proforma invoice simply on the following basis:
- A document with similarities to the regular invoice, which gives details to the agent about the products’ specifics to be delivered, is called a proforma invoice. Conversely, an invoice refers to a commercial document offered to the buyer comprising the information of goods or services given by the seller.
- You can use a proforma invoice for making sales, while you will use an invoice for confirming a sale.
- A Proforma invoice is a type of quote comprising the seller’s commitment to supply products at a particular date and price. On the other hand, the invoice is a type of bill showcasing the buyers’ amount.
- Proforma is a dummy invoice and utilized for making sales; hence, no entry is created in the books of accounts for a financial transaction. An invoice is a valid document that yields a financial transaction. It also serves as the fundamental for accounting entry for being made in both parties’ books.
- Sellers provide a proforma invoice on the buyer’s request before order placement. Conversely, the seller issues the invoice to the buyer for requesting payment of delivered products.
- The key objective of a proforma invoice is to assist buyers in making decisions about placing an order. On the other hand, a seller raises an invoice for requesting payments from his buyer.
Proforma Invoices vs. Estimation or Quote
People often get a quote but become confused with an invoice. However, the truth is these are two completely separate things when you are talking about money and business. Hence, let’s look at both of them to get more details about them and understand how you can use them. In case you have not done this already, read below the detailed difference between a proforma invoice and estimation or quotation.
Quote or Estimate
A quote is a formal estimate that displays the goods or services required and the billing amount for those goods or services. An estimate or quote can be written or verbal. It may be or may not be precisely the same as the final product in terms of goods, services, and the billing amount owed.
An estimate lets you understand how much you will be bound for the projected service or task. Moreover, it ensures you will just have an obligation for that amount and not a random number.
On the vendor side of things, an estimate or quote does not transform the inventory, as they have not finished the work. Once the seller sends an invoice for a product, the inventory numbers can then change accordingly.
Sometimes, a quotation is valid for a month, i.e., 30 days from the time of its issuing. You can readjust a quotation depending on your clients’ requirements. For instance, you may receive quotations from different ad agencies as you are seeking to redesign your website.
Then, you discover that you basically require a website redesigning service and a total content update. Thereby, you should ask for new quotations from the companies depending on the new amount of task you require.
Understanding a Proforma Invoice
As discussed earlier, a proforma invoice is quite similar to an invoice and quotation. A proforma invoice almost appears like an invoice unless you clearly mention that it’s a proforma invoice. In case you belong to an industry that involves products’ shipping and delivery, the proforma invoice also requires incorporating several details.
For instance, information on the procedure, packaging, the nation the products are coming from, the nation where you will deliver the goods and all other shipment details.
This proforma document is generally the jumpstart to a business agreement. It will list the goods or services requested and the amount that they will owe after you provide the service or sell the goods. An estimate can describe similar things. Although a quotation’s format is usually more like a letter, and a proforma invoice appears precisely like an invoice.
When you send a proforma invoice to a promising client, the individual can then decide whether he/she wants to undergo the transaction. They can decide depending on the data they see. Similarly, they can come back with an agreement with changes, or ask for a distinct cost, and the conversation continues from there.
This is everything you should know about the difference between a proforma invoice and a quote or estimate. In case you are searching for more details regarding various kinds of invoices, you should refer to a professional bookkeeper or accountant. They can help explain the details of an invoice, invoice financing and other concepts that are beneficial to you.
You don’t always need proforma invoices, but you can use them as an important part of your sales procedure. While quite similar to both a quote and an invoice, a proforma invoice caters to its exclusive purposes, and you can make it quickly using an invoice template.