Ankit Rahangdale is a seasoned finance professional with a distinguished background as a Chartered Accountant. Currently, he leads the Finance Department at Pice. With over five years of invaluable experience in the banking and finance sector, honing his expertise through esteemed institutions such as ICICI Bank and Standard Chartered Bank.
6 Nov 25
8 mins
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Proforma Invoice for Advance Payment: Meaning and Key Elements
It’s an advance or pre-sale document issued before the final commercial invoice to outline the terms, goods, services, and payment details of a potential transaction.
Sellers must ensure all details, quantities, prices, taxes, and total amounts, are correct to prevent misunderstandings and maintain buyer trust.
Key details such as seller and buyer information, invoice number, goods description, payment terms, validity period, and the seller’s signature are mandatory for a valid proforma invoice.
By clearly outlining transaction details, a proforma invoice eliminates confusion, fosters trust, and streamlines payment and customs processes.
Helps manage advance payments and refunds. Sellers can use proforma invoices to request advance payments and establish clear refund and cancellation policies to handle disputes or order changes effectively.
Do you know that using a proforma invoice for advance payment while transacting in goods and services can help you build trust with the buyer? However, your proforma invoice should be accurate without calculation and information errors.
For instance, if your estimated bill amount is ₹10,000, ensure you write the amount correctly and not an erroneous amount such as ₹1,000 or ₹1,00,000. If you want to learn more about what a proforma invoice means, its core elements and its need for sellers and buyers, here you will find all the answers.
Proforma Invoice for Advance Payment: What It Means
A proforma invoice is a preliminary bill of sale or advance invoice issued prior to a commercial invoice. Sellers send a proforma invoice to buyers prior to the delivery of goods or services. A proforma invoice highlights the potential transaction and hence is not a final payment request, unlike invoices.
Sellers involved in international trade usually use this document to declare the value of goods. This is an essential document for customs purposes, which highlights transactions with advance payment.
Essential Elements of a Proforma Invoice for Advance Payments
Certain elements mandatorily need to be mentioned on a proforma invoice to make it valid. The following are the elements that a seller needs to mention on a proforma invoice:
It should mention ‘Proforma Invoice’ at the top as a header.
As a seller, you need to mention your name, contact details, address and business registration number.
You should mention the buyer's details such as name, contact details and address.
A proforma invoice should carry a unique invoice number.
The date when you issue the proforma invoice should be mentioned.
You need to mention the goods or services description in addition to quantities and prices. For instance, if you list 2 items, pen and paper, of 3 quantities each with price ₹100 and ₹200 respectively, mention their description, such as pen and paper.
You need to specify the total amount, which includes applicable taxes and additional costs, including shipping costs. For instance, tax is applicable at 18% on ₹100, mention 18% * ₹100 = ₹18 and the total amount which is ₹18 + ₹100 = ₹118.
Ensure you mention the payment terms, which include the payment method and due date. For instance, if the payment due date is 20th August 2025, you need to mention it along with the payment method, such as credit card, debit card or UPI.
Mention the validity period for the proforma invoice, within which buyers need to make an advance payment.
The seller's signature needs to be present on a proforma invoice to make it a valid document.
A proforma invoice plays a significant role in advance payments. It acts as a legal document, helps in customs and payment processing, ensuring transparency. Here are the reasons why a proforma invoice is important:
Legal Document
A proforma invoice acts as a legal document between buyers and sellers that highlights the terms and conditions for agreement.
Processing of Payment
As proforma invoices present the details of goods and services along with their price, sellers can use them to ask for advance payment from buyers.
Customs Clearance and Shipping
In instances of international trade, a proforma invoice helps you declare the value of goods for customs prior to actual business transactions and the delivery date.
Transparency
A proforma invoice provides a detailed breakdown of the services or goods, their unit prices, quantities and terms of trade, ensuring transparency between sellers and buyers.
Advantages of a Proforma Invoice for Advance Payments
Eliminates Conflict
As proforma invoices are pre-sales invoices, they help avoid misunderstandings and conflicts between buyers and sellers.
Improves Trust
Using a proforma invoice helps sellers enhance the trust of buyers with documented details of a potential transaction.
Facilitates Advanced Financing
On receiving a proforma invoice, a buyer can arrange the funds for advance payments with clarity and details available.
Streamlines Processes
The use of proforma invoices streamlines processes for advance payment, with details provided to buyers beforehand. Buyers are aware of the payment terms, method of payment, due date and prices of goods or services.
Process to Create a Proforma Invoice for Advance Payment
Following a systematic process to create a proforma invoice helps incorporate all the necessary details for buyers, sellers and goods or services. Here are the ways you can create a proforma invoice, as a seller:
Use of a Template
A proforma invoice template contains all the necessary details that a seller needs to mention to the buyer. Using templates can help you systematically include the details.
Customising Details
For each buyer, ensure you customise the details to include the correct details.
Review the Details
Before you include payment terms, check if the details entered in the proforma invoice are accurate.
Include Payment Terms
Include payment terms and conditions such as payment mode, due date, amount of advance payment and others.
Send to Buyer
Once the proforma invoice is completed, you can send it to the prospective buyer to provide the future transaction details.
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Common Mistakes to Avoid While Creating a Proforma Invoice for Advance Payment
Ambiguous Terms
Providing ambiguous terms that are not clear to the buyers can impact trust and stakeholder relationships. Ensure your proforma invoice clearly presents all necessary details.
Incomplete Details
Sending incomplete proforma invoices would delay the potential transaction and advance payment. Ensure you fill in all the necessary details in the proforma invoice before you send it to the buyers. While using the same template, ensure you input all the details accurately.
Inaccurate Calculations
A proforma invoice includes details of all the goods and services along with their quantities and prices. Ensure you calculate the total amount along with taxes and shipping costs accurately to ascertain buyers' trust.
No Validity Period
To receive advance payments within the required time, ensure you add a validity period to your proforma invoice. This will create a sense of urgency in funding a future transaction in advance.
Ways to Manage Refunds and Cancellation of Advance Payment
Certain transactions might be cancelled after advance payment if the buyer disagrees to proceed further. However, setting specific refund and cancellation policies can help you handle such scenarios efficiently. Here are the ways to handle refunds and cancellations:
Setting Partial Refund Criteria
As a seller, if you set partial refund criteria for advance payments in proforma invoice payments terms, you can avoid a full refund to buyers. Thus, you can manage the transactions of goods and services effectively.
For instance, if 40% work is completed based on an order, you can keep 40% of the payment and refund the remaining 60% in case of full advance payment.
Assigning Cancellation Deadlines
Setting cancellation deadlines can help you notify the buyers about the due date by which they can cancel an order. This will prevent the refund of advance payments received based on proforma invoices.
For instance, you might set a 30-day period for order cancellation, beyond which the pre-paid order cannot be cancelled. This will help you avoid refund requests from customers.
Conclusion
A proforma invoice for advance payment helps streamline the process of payment before delivery of future orders. As a seller, you can inform potential buyers about the shipping details, payment options and terms using a proforma invoice. Further, buyers can know the total amount, including applicable taxes and shipping costs, to arrange funds for advance payment based on the proforma invoice.
As a seller, ensure you fill in the proforma invoice with correct details and error-free calculations to avoid hassles at customs clearance for international trade. Notably, a proforma invoice is different from a post-sales tax invoice or commercial invoice.
FAQs
What is a proforma invoice?
A proforma invoice is a preliminary bill or quotation sent before the delivery of goods or services. It provides detailed information about the upcoming transaction but is not a demand for payment like a commercial invoice.
Is a proforma invoice legally binding?
A proforma invoice is not legally binding as a final invoice, but it serves as a formal offer that outlines agreed-upon terms, making it a vital document for transparency and customs purposes.
How does a proforma invoice help in international trade?
It declares the value of goods for customs clearance before shipment, helping both sellers and buyers comply with import/export documentation requirements.
What are common mistakes to avoid when creating a proforma invoice?
Avoid ambiguous terms, missing or incomplete details, incorrect calculations, and failing to include a validity period or clear payment terms.
How does a proforma invoice differ from a commercial invoice?
A proforma invoice is issued before a sale to outline estimated costs and terms, while a commercial invoice is issued after the sale and serves as a legal demand for payment.
Ankit Rahangdale is a seasoned finance professional with a distinguished background as a Chartered Accountant. Currently, he leads the Finance Department at Pice. With over five years of invaluable experience in the banking and finance sector, honing his expertise through esteemed institutions such as ICICI Bank and Standard Chartered Bank.
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