What is a Proforma invoice? Differences, Usage & More

If you’ve received - or been asked to provide - a proforma invoice, you might need a bit of help interpreting the information included. This guide looks at the proforma invoice meaning and how it differs from other invoice types which may be more commonly used.

Join us as we explore: what is the difference between a commercial invoice and a proforma invoice, and when is a proforma invoice used? Plus we’ll touch on Wise Business as a simple way to receive customer payments, including in foreign currencies, for your business.

What is a Proforma invoice?

A proforma invoice is a draft or estimate invoice which is issued prior to a sale being finalised.

A proforma invoice is not legally binding, and is used for information only. You might need to issue a proforma invoice to show a customer what their final bill is likely to look like, as part of a sales negotiation. Or, a proforma invoice may be required when importing or exporting goods, to detail the contents of a shipment.

Why might a business use proforma invoices?

We’ll look at the difference between a proforma invoice vs a tax invoice in a moment - but first, let’s take a few use cases where a proforma invoice might be handy.

A business might ask for a proforma invoice to model the costs of buying goods or services from you. This may be to allow the customer to compare the quotes from a selection of suppliers, for example, or to allow them to access the finance required to finalise the sale. The company might need to take out a loan, for example, and use the proforma invoice to show the loan provider what the money's for.

Use cases of a proforma invoice

If you’re shipping goods internationally, there’s also a good chance that you’ll need to provide proforma invoices. Assuming your customer has agreed to pay you when the goods arrive, the full tax invoice may not be ready yet. But to clear customs, border authorities will still need documentary evidence of what’s in the shipment, and the value of the goods being sent. A proforma invoice can be used to provide all of theis detail and to smooth the process of exporting.

A final common use case is when selling goods or services overseas. Even where there’s no physical import/export process to manage, a proforma invoice can help ensure clarity about the final invoice amounts and currencies. By providing a proforma invoice prior to completing the transaction, you have an opportunity to double check the customer’s preferred billing currency and payment method. If you’re using an account from a provider like Wise Business you’ll be able to offer the customer the opportunity to pay in their home currency for convenience, which can help with securing international sales.

Wise Business accounts offer local and SWIFT account information in 8+ currencies, allowing you to take customer payments from sound the world. Just use the handy invoice generator tool to create a professional invoice in the currency of your choice, and use your Wise account information to receive the payment in USD, GBP, EUR, NZD or whichever currency your customer prefers. You can then hold your balance in Wise in the foreign currency, to use for a future overseas payment - or convert back to dollars using the mid-market rate and low fees.

Sign up for the Wise Business account! 🚀

What does a proforma invoice look like?

A proforma invoice might look like any other invoice at first glance, but the information it includes can vary somewhat. Here’s what’s usually needed on a proforma invoice.

• Invoice type: As a proforma invoice is a distinct type of invoice, it must be clearly marked as such to avoid confusion
• Identifying number: A proforma invoice doesn’t necessarily need an invoice number or purchase order number, but should have a unique number to allow for easier tracking
• Supplier name: All of the supplier’s contact information should be included for follow up
• Item descriptions and costs: Line by line details should be given of the goods or services included in the invoice, including a description, unit cost and unit number
• Other charges: Any other fees such as taxes and shipping must be split out for clarity
• Total amount: A final billing amount should be shown, including the currency
• Issue date and validity period: A proforma invoice will remain valid for an agreed period of time only, which should be shown on the invoice - after this period of time the prices quoted do not need to be honoured by the supplier any longer

You’ll notice that the supplier’s banking information isn’t necessarily included in a proforma invoice. This is because a further invoice must be issued at the point of finalising the sale, which can include all of the financial information required. As a presale document, it’s not strictly needed on a proforma invoice.

Key differences: Proforma invoices vs other invoices

Proforma invoices have their own unique features and uses. To help you decide when you need a proforma invoice vs a tax invoice or another commercial invoice, let’s look at how they differ.

Proforma invoice vs tax invoice

A tax invoice is a legally binding document which is issued after a sale has been agreed, and which shows the final billing amount and payment terms. Tax invoices must also include all relevant tax and GST information, and be issued within 28 days of being requested by a customer.

A proforma invoice works differently. It’s not legally binding, and is issued prior to a sale being agreed, as an estimate of the costs involved. Tax information may be included, but it’s not always required. As the proforma invoice is not a demand for payment, tax is not owed at the point this document is created or issued.

Here’s a quick comparison of some of the key features of a proforma invoice vs tax invoice:

Is a proforma invoice a tax invoice?

No. A proforma invoice is not a tax invoice.

A tax invoice must be clearly marked as such, and must be issued if you’re a GST registered business making a taxable sale over the value of 82.50 AUD (including GST)¹. You must also issue a tax invoice if your customer requests one, even if the amount billed is smaller.

Difference between a commercial invoice and a proforma invoice

So, what’s the difference between a commercial invoice and a proforma invoice?

Both can be useful in different circumstances, but they don’t have the same purposes. Generally, a proforma invoice is used when negotiating a sale. It’s an estimate of the costs of delivering goods or services, which may still ultimately change. A business may request a proforma invoice to allow them to plan for costs, compare different providers, or to form the basis of a negotiation.

A commercial invoice, on the other hand, is issued after a sale has been agreed, and is a legally binding demand for payment. Where GST or tax applies on a sale, this must also be included in the commercial invoice.

You could be required to provide a proforma invoice prior to agreeing a specific sale, and then to follow it up with a commercial invoice or a tax invoice after the sale has been completed.

Proforma invoice vs quote

One final question - what’s the difference between a proforma invoice vs a quote?

Both have similarities in that they’re not legally binding, issued prior to a sale being agreed, and designed to help a customer understand the costs of a purchase. However, they’re not normally exactly the same, and some businesses might specifically rely on one or the other in most cases.

Generally a quote is considered to be a more general indication of pricing for goods or services, while a proforma invoice is likely to include more information. A business might ask for a proforma invoice rather than a quote in order to have a more thorough run through of the pricing proposed, as well as any other terms which may be imposed on the sale.

If you’re asked for a proforma invoice it’s worth talking through the customer’s specific needs so you'll understand which information must be captured for you to secure the sale.

Finding the right use for a Proforma invoice?

Managing your business finances isn’t always the most enjoyable thing about being an entrepreneur. But it’s essential to understand invoicing in all its forms, to help you connect with a variety of different customers, and get paid promptly once you’ve finalised a sale.

This guide should help you understand when and why a proforma invoice might be handy - and pick apart different invoice types so you’ll know which is the right tool for the job in hand.

While you’re thinking about streamlining your business finances and processes, why not also take a look at Wise Business to manage your money across currencies with low fees and the mid-market exchange rate. Invoice and get paid in foreign currencies, to connect to customers around the world.

What's more, you'll benefit from the following with a Wise Business account:

• Free to register — Hold and convert between 40+ currencies. Send to 140+ countries
• Debit cards for you and your team, which you can use in 150+ countries
• Multi-user access for team members, with ways to control and manage permissions
• Pay up to 1,000 recipients at once with the Wise batch payments feature
• Integrate with your favourite cloud accounting solutions like Xero, Quickbooks, and more
• Get account details to receive in 8+ currencies for a one-time fee of 65 AUD

Sign up for the Wise Business account! 🚀

1. Australian Government - invoicing