The current realities of legal compliance related to domestic and global trade are indeed multifaceted and complex. India’s booming international trade, with merchandise exports reaching $394.99 billion in 2023-24 (Ministry of Commerce and Industry), has made a pro forma invoice indispensable for businesses, ensuring seamless transactions and compliance with trade laws. If you have still not explored about trade license than do it now.
This seemingly simple piece of information has proven invaluable, presenting several major advantages that go well beyond mere cost calculation. It promotes honest and clear communication, secure compliance with the requirements of international trade laws, and trade procedure simplification. There are many government schemes emerging to help traders one of them is Nirvik Scheme.
Pro forma invoices have genuinely become one of the most indispensable tools for the business, and below is a list of 10 proven benefits that only scratch the surface of their potential.
What is a Pro Forma Invoice?
A pro forma bill is not a regular invoice. Instead, it is a draft bill issued by the seller to the buyer before anything is sold or delivered. While the items being sold and offered are revealed with their prices, payments, and delivery terms and conditions, it is a non-binding quote.
Proforma Invoices, Taxes, and VAT Explained in Simple Terms
A proforma invoice doesn’t set the official date for when taxes are counted. This official date is called the “time of supply,” which is when the sale is considered to have happened for VAT purposes.
For example, if you sell raw leather materials, each piece needs to be measured in the warehouse to confirm its size.
- You send a proforma invoice to a customer interested in an item. This invoice includes all details about the potential sale. At this stage, the tax point hasn’t been set, so you don’t use the date on the proforma for tax purposes.
- Once the customer agrees to buy and makes the payment, you then issue a final sales invoice. The date on this final invoice is the tax point and is the date you use for your VAT records.
Benefits of Using a Pro Forma Bill
In addition to estimating costs for potential customers, pro forma invoices come with an impressive list of benefits. Here are ten major benefits to consider that empower your business:
Secure Commitments and Pre-sales Orders
A pro forma invoice doubles as a form of a contract that is not legally binding. Specifying the necessary details, such as costs and expected deliverables, incentivizes potential customers to commit to buying their product or service.
It has been found that most B2B companies struggle with closing deals due to less-than-transparent communication about pricing and value propositions. A pro forma invoice allows you to resolve that problem ahead of time, increasing the likelihood of landing pre-sales orders. While using GeM portal for procurement Bidder should provide Pro forma invoice to process EC application.
Increase Customer Confidence and Transparency
Creating a well-organized pro forma invoice presents you as a professional, instilling confidence in your potential clients. The use of a pro forma invoice shows clients that you care about doing business and are upfront about your pricing.
These bills are great for business, considering that it breeds trust, and your business will be a step ahead of your competitors, who may not be straightforward about the possible costs of procuring goods and services.
Improve Internal Communication and Workflow
A pro forma invoice is a great way to manage internal business functions. It helps in creating a central, concise record of transactions to be done before taking it to your customers or signing them. Therefore, it is an effective communication process that the stakeholders can approve.
Facilitating Import/Export Transactions & Customs Clearance
A Proforma bill is equally important for international businesses. It is useful for customs clearance, including details of the worth of goods to be exported or imported, allowing the cargo to pass through customs easily.
Reducing Payment Delays & Disputes
Another way a proforma invoice can prevent potential damage in a business relationship is to avoid payment delays or disputes.
Indeed, since a proforma invoice details the client’s expenses to be covered before completing an order, it is easier to enforce a payment agreement and outlay the terms and conditions before shipping the products.
Better Sales & Marketing
Pro forma bills can also become a strong sales tool. Including them in your marketing materials, such as presentations, allows you to advertise your business and pricing to potential clients.
Some of them can be interested in your services afterward, hence boosting sales.
Cash Flow Forecasting
Especially in the case of pre-orders, a pro forma invoice may become beneficial for the finance team. With the information about revenue performance supplied by confirmed pro forma invoices, such teams will be able to perform more precise cash flow forecasting. Here are few ways to manage cash flow for MSMEs.
Facilitate Effective Negotiations
Further, pro forma invoices establish the basis for negotiating contracts with potential clients. In this regard, having a memorandum that articulates the costs enables productive negotiations on the price to be charged.
As a result, both parties are likely to reach a mutually beneficial agreement.
Improve Project Management & Cost Control
The development of a pro forma invoice requires one to engage in cost-effective discussions regarding the breadth and depth of the project.
Thus, through the pro forma invoices, a business can identify the areas that need to be cost-optimized to ensure the creation of a product that does not exceed the budget.
Legal Compliance
Certain industries or jurisdictions may have legal requirements for the information to be included in the invoice or the pro forma invoice. A pro forma invoice designed by a professional can help meet these requirements, thereby eliminating potential penalties or legal actions.
Strategies To Create Effective Pro Forma Invoices
To create an effective pro forma invoice, be sure to consider the following:
- Key details: Mentions details such as company logos, contact information, invoice number, and date
- Outline of products/services: Include comprehensive descriptions that note quantities and unit prices
- Payment terms: Mention the payment method, due date, and any applicable late fees
- Realistic timelines: Indicate delivery schedules or project completion date
- Professional format: Use professional language, consistent fonts, and effective branding elements
Apply for Loan on Invoice
Takeaway
The above overview has demonstrated that the pro forma invoice is indeed a game-changer, offering multiple advantages to businesses involved in international and domestic trade.
Well-equipped to deliver transparency, legal compliance, and operational efficiency without much muscle-flexing, it is a document that any business can hardly do without.
However, financial constraints are still a significant obstacle to realizing such gains. Indifi offers customized financial solutions that enable businesses to address their financial challenges and optimally use a pro forma invoice for greater competitiveness in the international market.
FAQs
- Are pro forma invoices legally binding contracts?
No, pro forma invoices are not legally binding contracts but a provisional arrangement to express the proposed costs and terms.
- Can I use a pro forma invoice for online sales?
Pro forma invoices can be used for online sales as a great strategy for being transparent about actual prices and terms with potential customers.
- Which software can be used to create Pro forma invoices?
Accounting and invoicing software, as well as online template builders, can be used to create pro forma invoices.