Importance of Pro forma Invoice in International business

7th March, 2014

By Shalishkumar, International Business Consultant

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Often when potential importers are duly satisfied with your product, quality, sample sent for approval or lab analysis, packing, delivery schedule and prices acceptable. They request for a firm offer from the exporters.

What do most exporters provide their prospective buyers? Offer Quotation indicating Price, quantity and cost of transportation? Other terms like :- Mode of payment, product availability, shipping instructions and service charges? Terms of sale, description and delivery time?

Well, you guessed it. This is not enough information for importers to make a buying decision. To make life easier for buyers, exporters should always quote using a carefully prepared pro forma invoice.

It is a common occurrence for most exporters to provide their buyers with quite limited information when asked for a quotation. This lack of detail and accurate information by exporters is probably a major factor why products with good quality and competitive prices do not get sold.

Whether you are the exporter or the importer it is quite critical that you understand how successful exporters quote buyers using pro forma invoice. You should be able to clearly distinguish the differences between quotation, pro forma invoice and commercial invoice. The following brief descriptions are intended to help you understand their differences and to provide you with all the items that you should include in a pro forma invoice plus the areas that you have to consider when completing a commercial invoice.

Quotations

A worksheet for calculating export costs to sell goods or services at a stated price and under specific conditions, the quotation is generally presented to the buyer in a formal way using a pro forma Invoice. A quotation may include all the contents that appear in a typical pro forma invoice except: (1) country of origin of product, (2) the title Pro Forma Invoice is usually not included in a quotation.

Pro Forma Invoice

A price quotation prepared in the form of an invoice, a pro forma invoice is different from commercial invoices is that - it is used to create a sale and is sent in advance of the commercial invoice. The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreement although the price might change in advance of the final sale.

For establishment of LC or for advance payment by the importer through his bank. Usually Banks prefer Pro forma Invoice to a quotation.

In some countries, the U.S. for example, Customs may accept a pro forma invoice (generated by the US importer and not the exporter) if the required commercial invoice is not available at the time when filing entry documents (entry - the process of filing documents with U.S. Customs at the port of entry to get goods released from Customs). U.S. Customs may use a pro forma invoice to assess duty and examine goods. The importer on record however, is required to post a bond and produce a commercial invoice within 120 days from the date of entry. If the required commercial invoice is needed for statistical purposes the importer has to produce the commercial invoice within 50 days from the date Customs releases the goods to the importer.

Here are some reasons why pro forma invoices are widely used in international transactions:

Considered as a binding agreement between exporter and importer. May be required by some countries as part of their import licensing procedures. Bankers and financial institutions use pro forma invoices to open letters of credit, advance payments, etc., for importers.

Easily recognized due to their similarity to commercial invoices. Pro forma invoice format encourages exporters to include all the information that shall appear in the commercial invoice.

Keep the following points in mind when your company is asked to produce a pro forma invoice:

Remember that pro forma invoices are formal offers to sell. When the buyers agree with all the terms and conditions of the pro forma invoice the result is a purchase order sent by the buyer, which finally leads to a sales contract that is, if the buyer and the exporter agree to have a formal sales contract. The pro forma and purchase order must be compared before goods are shipped to check for discrepancies. Should there be a discrepancy, the buyer should be promptly notified to correct any errors.

Commercial Invoice

Prepared after the sale takes place, the commercial invoice is the final bill from the exporter to the buyer that conforms in all respects to the agreement. It could have the exact terms of the pro forma invoice first offered, or it could differ in those terms that were the result of final negotiations. Commercial invoices are also used by governments to determine the true value of goods for assessing Customs duties, examining goods and gathering statistics. Additionally, many countries use commercial invoices to control imports. It is critical for the exporter to check with the buyer the type of information that must be included in the commercial invoice in order to clear Customs in the buyer's country. Here are few key areas to consider when producing a commercial invoice.

Should be prepared in the manner customary to trade. Most countries require that a commercial invoice must be filed for each shipment. It must be original although some countries accept photo copies with a declaration by foreign suppliers, shippers or importers verifying that it is a true copy. When an invoice is not available some countries accept a pro forma invoice with information adequate to assess duty, examine goods and collect statistics.

Some countries may require a special Customs Invoice - US for example, waived Customs Invoices in March 1, 1982.

Common Invoicing Mistakes by Exporters

The following are a few of the many common invoicing mistakes that are often made by exporters. Any of the following mistakes may cause delay, crippling penalties or total seizure of products by Customs officials.

Under invoicing, declaring less than the actual value of goods.

Remember, at a minimum, an invoice must always clearly show the total invoice value, non dutiable charges, add to make market value (if dutiable), and net entered value of the merchandise imported.

By carefully preparing a pro forma invoice, the exporter can increase the chances of the offer to sell to be accepted by the buyer and eventually increase the exporter's sales and profit. Because the pro forma invoice is the first document the buyer receives from the exporter, there is a psychological advantage in laying everything out, since the easiest thing for the buyer to do is to accept the proposed offer. Help your buyer to accept your offer by providing a thoroughly prepared pro forma invoice.