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Proforma Invoicing
When is the right time to send a Proforma and how should it be used.
A proforma invoice is a bill of sale issued to a customer to establish a transaction before goods and/or services are sent to the customer by the supplier.
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Whilst it looks similar to a conventional commercial invoice i.e. it contains a description of items, date, subtotal, total balance, supplier and customer details, and tax details – it rather functions similar to a quote or estimate and therefore may be subject to change. A Proforma Invoice should also be labelled “Proforma” accordingly to distinguish it from an a conventional invoice.
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Due to a Proforma Invoice being largely provisional it is not classed as a legally binding document and there is no obligation for a customer to pay it. It also cannot be used to claim VAT back or for accounting purposes as there is typically no payment information or sequential invoice number found on a Proforma Invoice.
Therefore, if a business has issued a Proforma Invoice for goods and services which have been received by a customer then a commercial Invoice containing an Invoice number etc should be subsequently issued within 14 days (following the 14 day rule). It should also be noted that a Proforma Invoice should not be sent as a means of demanding payment prior to a transaction. Instead this is simply an "Invoice in advance" which is simply a commercial invoice sent prior to the transaction.
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Issuing a proforma Invoice is a useful tool as it:
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a) reduces the risk of payment disputes when commercial invoices are eventually raised and
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b) you can request full upfront payment or partial payment before goods and/or services have been exchanged so that businesses have the assurance that their customer(s) are committed to a transaction especially when trading internationally.
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c) Helps with cash flow as businesses are not having to wait months in advance for payment.
Issuing Proforma Invoices to new and existing Customers.
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Proformas are also a good tool to use when onboarding new business customers, especially those which are newly incorporated and thus have little trading or credit history. Issuing a Proforma for the first few transactions at least can establish a trusting and potential fruitful relationship with little exposure to risk of non-payment.
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This works be issuing a Proforma Invoice before any goods and/or services have been released which is essentially a request for payment as it lets the business customer know just how much they will be getting charged so that they can seek approval from their accounts department. Once a firm agreement has been made you can then raise an Invoice in advance which is simply a conventional commercial invoice sent before the transaction. This would contain all the necessary payment details and a sequential invoice number for accounting records.
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It can also help with repairing a previously broken-down relationship through non or delayed payment. For instance, a business may have had trouble with a bad paying business customer which unfortunately ran into their own internal and/or external issues. Whilst a non-paying customer may cause huge ramifications to the success of your own business, it should be noted that many small businesses run into difficulties which are beyond their realm of control i.e. economic or political situations. If a business customer has always maintained communication and attempted to pay as much of the invoice as they may possibly can then it may be worth using switching to a Proforma form of payment i.e. requesting payment upfront in order to keep revenue flowing into your business.
An existing bad paying business may also restructure and be taken over by new owners and implement a new management structure with a stronger payment ethos. Raising a proforma therefore helps businesses reintroduce stringent trading rules with a once troublesome business customer without repeating the same risks of non-payment.
What a Proforma Should and should not Include.
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Business names and addresses for you and your customer
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Details of the goods and/or services that are being estimated
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A breakdown, subtotal and final total of how much they will owe
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Any additional costs such as shipping and Taxes.
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The Date if which is was raised
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Any Payment Terms i.e. ramifications of paying late etc.
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Sequential Invoice Number
Payment Details
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A formal demand for payment.
