A pro forma invoice is used to offer an initial product price quotation, preceding the actual sale of that particular product. It may be used also to give the potential buyer additional details on the product. Since the pro forma is the initial quotation price, it is not a legal document. A pro forma invoice is simply a confirmation of a purchase order. There are a few reasons why a seller or buyer may need to use a pro forma invoice.
Clarification and Contact Details
Pro forma invoice is recommended as a source of contact between the buyer and seller. It must be appropriately identified for what it is with the word pro forma clearly labelled on top of the invoice. It is an important source for information such as the seller and buyer's names and addresses. By using a specific date on the pro forma invoice, the seller could revise the final invoice to reflect the new dynamics.
Export and Import
Complex trade transactions may require the trade parties to use a pro forma invoice for clarifications. For instance if one country is purchasing goods from another country, there may be currency and exchange rate issues. Such issues would be clearly explained through the use of a pro forma invoice. Others issues such as shipping or freight cost can be tabulated in the pro forma invoice.
Custom Duty Calculations
Pro forma invoices may also be used to calculate the anticipated cost for customs duties when the goods are crossing borders. It is always good to avoid surprises in trade exchanges. The pro forma invoice aims at addressing all factors which may be involved in specific trade obligations.
The pro forma invoice for all intents and purposes is not binding on the parties involved. Its contents, however, may look similar to the final commercial invoice, but it does not necessarily have to be the same. It gives the seller an opportunity to revise the cost calculations prior to issuing the final cost. The buyer has the option to review the planned purchase, and may decline the purchase altogether.
The pro forma invoice is a very good document to support transaction funding applications. When a transaction trade involves significant cost, the buyer may need to seek additional financing for the project. This is where a pro forma invoice comes handy. A bank or financial institution may use the pro forma invoice as a basis of establishing a letter of credit to the buyer.