A proforma invoice has all the familiar components of an ordinary domestic invoice: a description of the product, an itemized listing of charges, and sales terms, except that it states clearly "Proforma Invoice." In this article, you'll explore what a proforma invoice is, why you should use one, and how to prepare it.
What Is a Proforma Invoice?
A proforma invoice is considered a pre-advice document and serves as a guide to action on what the expectations are on an export sale. It also sets the stage for the negotiation process.
Why Use a Proforma Invoice?
A proforma invoice helps tighten the export sale. Here are some ways in which a proforma invoice is helpful:
- Minimizes errors
- Serves as a legal, binding agreement
- Outlines all relevant information pertaining to the export transaction
- Is a widely accepted form of sales document structure in the export industry
- Enables banks to establish a payment method on behalf of the importer
Let's say you want to get your customer a landed price quote for a shipment of hairbrushes to their port of entry, in this case, CNF (cost and freight) Rotterdam. Here's how you prepare the invoice.
How to Prepare a Proforma Invoice
U.S.A. Widgets to Rotterdam via Ocean—Calculating Landed Price per Unit
You have 100 cases of hairbrushes, packed 12 units to a case. Each case is priced $120, or $12 per unit. Total cost for the order is $12,000.
- Selling price: $12,000—F.O.B. factory door in the U.S.A.
- Inland transport: $700
- Ocean transport: $1,500
- Duty: $300
- CAF: $1,250
- Documentation: $125
Total Landed Price (or Total CNF Rotterdam)
The selling price is your cost to buy the product from the manufacturer, plus your markup. Add that figure to the total shipping costs and divide that total by the number of cases. That gets you your landed price per case. Divide that figure by the number of units in a case. That gets you your landed price per unit. In front of the word "invoice," type "proforma."
You have now finalized your price quotation and created a proforma invoice. Don't forget to specify a precise time period during which your quote is valid, and add the freight forwarder's (logistics specialist's) quote reference number.
Is there a difference between a price quotation and a proforma invoice? There is very little difference between the two. The proforma invoice serves as a quotation in an invoice form. A quotation is drafted more like a business letter or detailed email describing an agreed upon offer that is usually in writing, while a proforma invoice appears exactly the same as an invoice, except for the statement of "Proforma Invoice" at the top.
Once your customer approves the proforma invoice, it will become your actual invoice for the order. The customer will also use the proforma invoice to obtain any necessary funding or import licenses. Your customer should communicate acceptance in a short written sentence or two such as the following (usually via email or fax), with a signature: "We accept your proforma invoice No. 1234 against our P.O. No. ABCD." You will then respond: "Acknowledge and confirm your P.O. No. ABCD against our proforma invoice No. 1234."
That's it. You have a sale. You're in business! From this point on, no additional changes should be made to the transaction by you or your customer until after the expiry date is given on the proforma. Before you release the order, though, you and your customer must negotiate terms of payment. There are many factors to consider when choosing an export payment method. Be sure to examine all of them before finalizing your transaction.