What is a Proforma Invoice? Uses, Key Aspects and Format

Changing the details of an invoice after it has been issued is a cumbersome and complex task due to SST compliance and accounting complexities. With the implementation of e-invoicing in Malaysia, cancelling or adjusting an e-invoice becomes even more complicated as it is submitted and validated in real-time.

To address this issue, sellers issue a proforma invoice to buyers. Proforma invoices include detailed descriptions, cost estimates, and charges related to a purchase, ensuring that both parties agree on the transaction details before finalizing it. A proforma invoice is used instead of a tax invoice to avoid creating a payment demand, tax liability, and legal obligations prematurely.

This blog will provide a comprehensive overview of proforma invoices, including their characteristics, templates, uses, and format. It will also highlight the key differences between proforma invoices, tax invoices, and quotations.

What is a Proforma invoice?

A proforma invoice is a preliminary bill of sale sent to buyers in advance of a shipment or delivery of goods. It outlines the details of the transaction, including the type and quantity of goods, their value, and other important terms.

Unlike a commercial invoice, a proforma invoice is not a demand for payment; rather, it serves various purposes such as providing information for import/export documentation, securing funding, or ensuring the buyer and seller are on the same page before the transaction proceeds.

Key Aspects of a Proforma Invoice

• Non-Binding Estimate: It is not a legally binding document but an estimated invoice that provides the buyer with an overview of the goods or services, including their cost and expected delivery date​.
• Detailed Description: It includes detailed information about the goods or services, such as quantity, weight, type, and price. It might also include other details like shipping costs, taxes, and any other applicable fees​. 
• Basis for e-invoice: Once the terms are agreed upon, the proforma invoice can be used as a basis for issuing the final commercial invoice.
• Customs Purposes: In international trade, a proforma invoice can be used by customs to determine the value of the goods, even though it’s not the final invoice​​.
• Not for Accounting: Since it is an estimate, a proforma invoice cannot be used for accounting purposes. 

Uses in Business

Proforma serve several key purposes in business transactions. Here are the major uses of proforma e-invoices:

1. Estimation and Quotation: Proforma e-invoices help the buyer understand the potential costs, including item descriptions, quantities, and prices, and aids in budget planning and decision-making.
2. Customs and International Trade: In international trade, proforma e-invoices are used to declare the value and details of goods to customs authorities before shipment. This assists in pre-clearing goods and estimating duties and taxes.
3. Negotiation Tool: They outline the terms of the sale, including prices, delivery schedules, and payment terms, providing a basis for negotiation before finalizing the contract.
4. Documentation for Credit Approval: Buyers can use proforma e-invoices to apply for a letter of credit or other financing options. Financial institutions often require a detailed proforma invoice to assess the creditworthiness and legitimacy of the transaction.
5. Internal Approval Processes: Within companies, proforma e-invoices can be used to seek internal approval for purchases, ensuring that all relevant departments agree to the proposed terms before proceeding with the purchase order.
6. Inventory and Production Planning: Sellers can use proforma e-invoices to plan their inventory and production schedules by understanding the potential demand through these estimates.
7. Banking and Insurance Propose: in some cases -international transactions - escrow

Details Mentioned in a Proforma Invoice

1. Invoice Title: Clearly labelled as "Proforma Invoice."
2. Seller and Buyer Details: Full contact details of both the seller and the buyer, including names, addresses, and phone numbers.
3. Invoice Number and Date: A unique invoice number and the date of issue.
4. Description of Goods/Services: Detailed description of the goods or services, including quantities, unit prices, and total price.
5. Terms of Sale: Payment terms, including method and currency of payment, as well as any discounts or additional charges.
6. Shipping Information: Mode of transport, shipping costs, delivery dates, and other relevant shipping details.
7. Taxes and Duties: Information on any applicable taxes, duties, or fees.
8. Validity: The period for which the proforma invoice is valid.

Proforma Invoice vs Tax Invoice vs Quotation

Proforma Invoice Format: Excel Template

You can now download our Proforma Invoice Format as an Excel template. This easy-to-use Proforma Invoice Excel template allows you to fill in all necessary details quickly and accurately.

Proforma Invoice Excel Template Download

Proforma invoice and e-invoicing

With the Malaysian government mandating e-invoicing since 1^st August 2023, the role of the proforma invoice has become increasingly crucial. E-invoicing requires invoices to be generated, submitted, and validated in real time, making it essential for both buyers and sellers to agree on terms and prices beforehand. The tight time restrictions for acceptance, correction, and reporting further underscore the importance of pre-agreement on all transaction details.

To ensure a smooth process, it is recommended to send a proforma invoice for all B2B transactions in Malaysia before issuing an actual e-invoice. This practice helps prevent discrepancies and facilitates a seamless e-invoicing experience.