A proforma invoice is little more than a preadvice of what will stand in the commercial invoice once negotiations have been completed. Indeed, the proforma invoice and the commercial invoice often look exactly the same, except that it should state clearly “proforma invoice” on this document, whereas the commercial invoice will state “invoice” or “commercial invoice”. The proforma invoice serves as a negotiating instrument. The initial proforma invoice often sets the stage for the first round of negotiations if the exporter and importer have not yet had any real discussions.
What is the difference between a proforma invoice and a quotation?
In reality, there is very little difference in function between the two and the proforma invoice is really a quotation in invoice form; in other words. the difference really comes about in terms of the structure and layout of the proforma invoice/quotation. A quotation appears more like a business letter describing a written offer, while a proforma invoice appears exactly the same as a invoice (except with the words “proforma invoice” written on the document). The proforma invoice essentially serves as a ‘quotation’ that sets the road to further negotiations. Some exporters choose to prepare an ‘official’ quotation, while others prefer to use the proforma invoice as their quotation. In fact, the quotation can contain the same information as a proforma invoice.
The role of the proforma invoice in the negoiation process
Assuming that an importer e-mails you – an exporter – asking you to submit a proforma invoice (or a quotation) for the supply of 100 pumps according to a set standard. You would then prepare and submit a proforma invoice to the potential importer outlining a desciption of the product, what the price is, what the delivery terms will be, what the payment terms will be, as well as any other information that may be pertinent to the sale. The importer will most likely reply to your proforma invoice requesting/negotiating different requirements such as a lower price, longer terms of payment, different methods of payment, a different delivery schedule and may even request changes to the product specifications. Based on these requests from the importer, you may choose to comply or to refer back to the importer (probably via telephone, fax or e-mail) to discuss or negotiate compromises to these requirements. When you and the importer finally come to an agreement, a second (sometimes even third or fourth) proforma invoice will be exchanged between the two parties. This final proforma invoice – accepted by the importer – sets the stage for the further processing of the order. You should be aware that the importer may use the proforma invoice to request foreign exchange within his/her country if his/her currency is not freely convertible. The proforma-invoice can also help the importer apply for a letter of credit at his/her bank.
In other instances where the exporter and importer have met before and have already discussed and thrashed out an agreement perhaps in a face-to-face meeting, only one final proforma invoice is necessary to confirm that the two parties are indeed in agreement. Every proforma invoice should be as precise and as explicit as possible to ensure that both parties understand each other. If the importer is satisfied with this final proforma invoice, he/she will request their bank to issue an L/C on the strength of information stipulated in the proforma invoice. For this reason, it is essential that the proforma invoice be extremely accurate, clear and concise. Any errors or misunderstandings will be transferred to the L/C and will cause problems, frustrations and delays down the line. What is more, the proforma invoice is also important to the importer for the purpose of obtaining an import permit and foreign exchange allocation within his country. At the same time, the exporter may use the proforma invoice and acceptance of the order from the importer to obtain funding to pay for the manufacturer of the goods concerned.
Details pertinent to the proforma invoice
The following details are pertinent to the setting up of the proforma invoice and need careful attention:
- A complete and clear description of the goods in question
- The quantity of goods in question including the number and kinds of packaging involved
- The total price of the goods (and unit price where applicable)
- The currency in which the goods will be sold (e.g. US dollars or rands)
- The likely delivery schedule and delivery terms
- The physical addresses of both the exporter (referred to as the shipper) and importer (sometimes referred to as the consignee)
- The payment methods, for example cash in advance or L/C
- The payment terms, for example 30 days on sight
- The Incoterm to be used
- Who is responsible for the banking fees and other related costs (insurance and freight costs are covered by the incoterm in question)
- The exporter’s banking details
- The country of origin of the goods
- The expected country of final destination
- Any freight details such as the port of loading and discharge
- Any trans shipment requirements
- Any other information relevant to the order