There are often situations in business where you may need to get paid in advance for products or services. For example, a large order comes in for a whole load of equipment and you don’t want to take the risk of not getting paid. So how do you request payment for things that haven’t been sold yet and may not even exist? Let me introduce you to the Pro Forma Invoice!
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What is a pro forma invoice?
A pro forma invoice is a document that can be issued to a customer to request payment upfront for products or services. There are a few important considerations before issuing a pro forma invoice and in most cases a normal invoice would probably suffice. However there are situations in business where a pro forma can be useful and if your customer asks for one the last thing you want to say is “What’s one of those?”. Oh, and by the way, in the world of business the term ‘pro forma invoice’ is normally just shortened to ‘pro forma’. “Have you issued the pro forma for that sale yet?” or “There’s no way on earth they’re getting that much gear on credit – give them a pro forma and see if they actually cough up!” are a couple of examples of what might be said in the real world.
How is it different from a normal invoice?
As mentioned in this article, a normal invoice fulfills two key roles in business – it’s a tax document and it’s a legal document. From a tax perspective it’s used for your own accounting records and the accounting records of the person you issue it to. From a legal perspective it’s a formal demand for payment. If the customer refuses to pay then the invoice is one of the key documents to ascertain what was being purchased, when and how much for. The invoice will also clarify additional ‘rules of engagement’ for the sale, normally via a reference to your terms & conditions. You’ve done some work and / or provided some goods and you need paid for those things. The invoice is how you get your money.
A pro forma invoice on the other hand, is a request for payment for stuff that you haven’t actually sold yet. Services that haven’t been fulfilled or goods that haven’t been delivered. As such a pro forma can’t be used as a tax document and is also of limited use as a legal document. In many ways a pro forma is closer to a quote than an invoice. Indeed many companies use a modified quote template as a pro forma.
What does a pro forma look like?
There’s no hard and fast rules for the formatting of a pro forma invoice. Since it’s such an informal document it’s really up to you what you include on it. Apparently you’re supposed to use the phrase “This is not a tax invoice” or “This is not a VAT invoice” however in many cases that doesn’t make sense and I can’t find an reference to this requirement anywhere on the HMRC web site. In fact I can’t find any reference to pro formas AT ALL on the HMRC web site. Read in to that what you will. I have seen non-VAT registered businesses issuing pro formas with the “This is not a VAT invoice” line on the top. This is really nonsensical if the business isn’t VAT registered in the first place and it’s why I prefer to say “This is not a tax invoice”. If you know different please let me know!
In the interests of not reinventing the wheel, this is what I like to include on a pro forma invoice:
- The words “Pro Forma Invoice”
- The arguably pointless phrase “This is not a tax invoice”
- Date
- Reference number *
- Customer name & address
- Full breakdown of what they’re buying, costs etc.
- The phrase “No VAT to pay” if you’re not VAT registered, just to give them heads up
- How long the prices are valid for
- E&OE
- Link to Terms & Conditions
- Full payment details, bank transfer information etc.
- Your business details, name, address etc.
* I have heard rumours that you’re not supposed to include anything on a pro forma that could make the customer think it’s a formal invoice, such as an invoice number. While I agree call it an ‘invoice number’ would be grossly misleading on a pro forma, it is very handy to be able to reference the pro forma to an order number or otherwise. So I do always include a reference number, not an invoice number. If this site goes dark it’s probably since I’ve been sent to prison on this matter.
When do you use pro forma invoices?
Most of the time normal invoices should be fine. Personally speaking there’s only generally two situations where I use pro-formas:
- When supplying high value goods or services to a new customer or unknown entity and you don’t want to risk giving them a credit account
- Established businesses who insist on a pro forma instead of a regular invoice for pre-payment of an order
Beware of scams!
PLEASE always be aware of pre-payment scams. If it looks too good to be true it probably is too good to be true. In my experience, if an unknown entity appears from nowhere and wants to pay you upfront for a high value order, 9 out of 10 times it’s a scam. Be very careful and do your homework.
Member Downloads
If you’re a website member you can download a sample pro-forma invoice below. Obviously customise this template to suit and always get your accountant to check things over first to make sure they’re suitable for the way your individual business runs. Downloads are available in Excel and Open Document formats.
Pro Forma Invoice Template v2.0 (Excel format)
Pro Forma Invoice Template v2.0 (Open Document format)
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