The world of logistics is moved by relationships. Companies around the world interact with dozens of suppliers on a weekly basis to ensure they are receiving the highest quality inputs for their products. Many of those relationships are ongoing, with repeated processes to cover existing demand. Others will be first time interactions, with companies inquiring about potential costs to find the ideal supplier for a given good or service. In both scenarios, trust is essential to create a successful relationship. 

To remove any uncertainty from the negotiation process, buyers and suppliers alike have created a series of common practices that create trust and ensure the success of their relationship. At times, these take the form of documents that provide a textual backing to the negotiation process and provide security to both actors. And when it comes to trust in logistics, no document is as important as a proforma invoice, making it a common practice across established suppliers. 

What Is a Proforma Invoice?

A proforma invoice is an intermediary document for the world of supply chain that outlines the costs of a good or service before it is received by its end consumer. It is meant to provide a buyer with some certainty about the total cost of a product after a series of negotiations and before delivery. Oftentimes, it outlines areas of variable costs to a good of service, providing a clear idea of the potential price changes a good or service could experience before reaching the buyer. 

Think, for instance, of transportation costs. Companies around the world hire transportation companies to deal with the movement of their products—when it comes to international logistics, this could also include imports and exports. However, a transportation company can’t provide a final cost to transportation before it has delivered goods. This is, in great part, due to the high volatility of the main resource used by container ships, air planes, and trucks alike: fuel. Thus, transportation companies often provide their customers with a proforma invoice outlining the fixed cost of transporting goods and the potential range it could charge for fuel. These additional variable costs are commonly referred to as surcharges.

Proforma invoices are not a requirement and are not legally binding. However, they do serve as a good-faith effort to provide a client with the potential cost of a good or service. A supplier could charge well above the price established in these documents but would also suffer a blow to its credibility.

Understanding Proforma Invoice

Proforma invoices are made by suppliers for their clients. Their main goal is to give clients an estimate of the potential costs of a good or service, allowing their teams to plan accordingly. It could also serve as a transition from informal conversations to the final delivery of a good or service. Above all, you can think of these documents invoices as a gesture from suppliers to buyers meant to build trust.

3 Main Purposes of a Proforma Invoice

Proforma invoices have three broad uses in the world of logistics.

1. They serve as an internal document that signals a shift in the interactions between buyers and suppliers. Before a proforma invoice is issued, both parties likely engaged in a number of conversations to define the cost of a good or service. These conversations are often initiated by the buyer who sends a purchase order to the supplier inquiring about the availability of certain goods or services. As such, these documents could be seen as the formalization of the sales process. For buyers, they might trigger an internal process to ensure suppliers will be paid upon delivery.

2. Proforma invoices are meant to help buyers plan ahead by receiving an estimate of the cost of a good or service. Even if there are variable costs involved, a these documents could provide buyers with an estimate of the cost to be incurred in the near future.

3. A proforma invoice allows the supplier to have one final check on the price with their buyer before sending the goods. This protects the supplier to some degree by providing reassurance that the buyer is aware of prices and is willing to cover them.

When Is a Proforma Invoice Issued?

In logistics, proforma invoices are delivered after the supplier receives a purchase order but before delivering a finalized invoice. They often reflect the result of various informal conversations between buyer and supplier, reflecting the cost range previously discussed. As such, it is one of the first documents reflecting the actual cost of goods. 

The Proforma Invoice Process

The general process for a proforma invoice, is the following:

1. Buyer sends PO to supplier

2. The buyer and supplier discuss the potential costs

3. The suppliers gives a proforma invoice

4. The supplier deliver the goods

5. The supplier gives the final invoice

 (Diagram by Desteia, icons attributed at the end of article)

Although the actual timing around issuing a proforma invoice will differ from supplier to supplier, they are often sent to the buyer before shipping a good or delivering a service. This allows suppliers to receive a final approval from their buyers before incurring the costs of sending a good or service. A finalized invoice is only sent once a supplier has delivered a good or service.

What Is In a Proforma Invoice?

Broadly speaking, a proforma invoice contains all the information you’d expect from a finalized invoice with one core difference. While a finalized invoice has a legally-required invoice number, a proforma invoice does not.

Excluding this one detail, you can expect a proforma invoice to contain: price, quantity, potential surcharges, buyer information, supplier information, and expected shipment dates. However, since these documents are not a legal requirement, they often change across companies.

Proforma Invoice vs Commercial Invoice

Although both an ordinary invoice and a proforma invoice reflect the costs of a good or service, they have various differences. A proforma invoice is a speculative document, trying to give the buyer a range of costs for a good or service to be delivered in the future. An ordinary invoice is a descriptive document, providing the client with the final costs of the products they agreed to buy.

Given this difference in nature, a proforma invoice is not a legally binding document and, as such, does not require an officially issued invoice number. Meanwhile, an ordinary invoice is a formal request for payment from a supplier to a buyer, thus representing a binding agreement between both parties.

Thus, proforma invoices can be used to trigger a number of internal processes in the buyer to ensure they have the needed resources to cover the cost of a good or service upon delivery. But, by no means, should these documents be used in the final accounting of a company given its speculative nature.

Icon credits: Design Circle - Flaticon, Wahyu Adam - Flaticon, Iconjam - Flaticon, Freepik - Flaticon, and Iconjam - Flaticon