"Pro forma" comes from the Latin "as a matter of form" or "for the sake of form." A proforma invoice is often as an itemized list with a price estimate that's sent a customer before any of the items are delivered. Essentially, proforma invoices are a preliminary bill of sale. Proforma invoices contain detailed information on services and goods, including the estimated total, quantity, contact details, general terms of delivery, and more.
Purchase orders, or POs, are used to request goods or services from a seller. While POs have many of the same details included in a proforma invoice, they usually have a finalized price and a unique invoice number for tracking purposes. POs are used to provide a paper trail for purchase requests and clearly communicate to suppliers what you need and expect.
In this blog, we'll go over the difference between proforma invoices and POs and how and when they're used.
How a proforma invoice is different than a PO
Although proforma invoices and purchase orders contain many of the same details, they perform very different functions. Both are sent before goods or services are received, but proforma invoices are sent by the seller, and POs are sent by the buyer. A PO, once accepted, is entirely binding, whereas proforma invoices include estimations and can be open to negotiation. It's important to keep a purchase order for you records, but proforma invoices can often be discarded once you receive an invoice.
When should you use a proforma invoice?
It is best to use proforma invoices whenever you want to provide details to a customer before receiving the goods or services. This will clearly express expectations to the buyer and improve relationships with clear communication. Proforma invoices can also be used for U.S. customs process, as they already have all of the necessary information for customs included. Proforma invoices can also be used if there is a heavy risk of items being damaged in transit, or when you want to ensure the scope of services for a project.
Benefits of using proforma invoices
There are many benefits of using a proforma invoice beyond the convenience of customs processing. First, it gives your buyer details on all of the items or services they will be receiving. This can mitigate any mistakes or miscommunications on either end and foster better relationships in the long-term. Another advantage is that it allows for adjustments before sending, such as fixing any of these aforementioned mistakes or any final negotiations.
The biggest advantage of proforma invoices is their flexibility. If you provide services for a large, ever-evolving project, it gives both parties the ability to make changes before a binding contract is agreed upon.
Cons of using proforma invoices
Proforma invoices do come with their downsides. While their strength is in their flexibility, that also means they will always only be an estimate. This can lead to surprise fees down the road for buyers. You cannot use proforma invoices for accounting purposes as they are subject to change depending on many factors. Because of this, it is important that a company later receives a binding invoice to ensure that there are no surprises and that there is legally binding documentation tied to the sale.
When should you use a purchase order?
Purchase orders are used when you want to request goods or services from a vendor without writing up a full complex contract with them. As a binding document, this allows for clear communication and protects you if the seller doesn't hold up their end of the deal. POs are a common way to request the purchase of items from a seller, but you also can ask for an invoice and agree upon that as a binding document instead of using a PO.