What is a Pro Forma Invoice? A Comprehensive Guide to Pro Forma

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      Pro forma, or proforma, is a term you often hear in a business environment, but many people have yet to learn what it means.

      If you’re in the corporate world, you should know about these documents. Pro forma financial statements and invoices are an integral part of modern business.

      In this article, we’ll do a brief overview of the following:

      • What does pro forma mean?
      • How pro forma financial statements are different
      • Pro forma statements vs. invoices
      • Creating pro forma invoices

      Let’s get into it.

      Pro Forma Defined

      Let’s start with the central question: what does pro forma mean? The term pro forma is of Latin origin and means ‘as a matter of form.’ The phrase has many meanings in modern English, depending on the context.

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      In a business context, the pro forma meaning may be one of two things:

      1. The process of predicting how a business will do in the future.
      2. Proforma financial statements based on forecasts.

      Pro Forma Financial Statements

      Pro forma financial statements are similar to most other types, with a few notable differences. While similar in form, pro forma figures don’t rely on generally accepted accounting principles.

      For one, they rely on financial projections and data from past projects to help determine values. In other words, they rely on hypothetical scenarios rather than fact.

      In most cases, financial documents include sundries and other operating expenses. However, they have a fixed value because the company has already paid for them or pays a predetermined price at a particular supplier.

      A pro forma document relies on financial forecasts and past values of operating expenses and sundries to predict the price for the future period.

      There are three main types of pro forma financial statements. Namely, they are:

      • Pro forma income statements or invoices
      • Pro forma balance sheets
      • Pro forma cash flow statements

      What is a Pro Forma Invoice?

      There’s a tiny difference between invoices and statements that make a big difference in terms of pro forma documents.

      Specifically, pro forma invoices cover a single transaction. For example, you may create an invoice pro forma for an order to print 100 t-shirts.

      The information for the document would come from past data and future predictions.

      Generally, this type of invoice has uses when you give an invoice before delivering a product or service. Rather than a payment request, these documents are a formal agreement outlining expected costs.

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      For example, an internet service provider may give a preliminary invoice for product installation and bandwidth.

      However, the actual cost of installing the product may be higher than initially predicted. Depending on the agreed-upon legal process behind the invoice, this could mean that the client must pay more or that the ISP loses money.

      What is a Pro Forma Statement?

      Unlike an invoice, a pro forma financial statement covers multiple transactions.

      3D illustration of the word pro forma invoice stamped on brown paper with a rubber stamp.

      Let’s stick to the t-shirt printing example listed above. That client may want six orders of 100 t-shirts each, but spaced over a longer time. An invoice wouldn’t work, because it would be six different transactions.

      However, since pro forma financial statements cover multiple transactions, they’re perfect for this occasion. Unlike a relatively short-term invoice, a statement can support an extended period. Accordingly, the predictions and calculations are also more complex.

      It’s worth noting that a pro forma income statement is something entirely different. Unlike simple statements, it focuses on the amount of income you can expect to generate in a given timeframe.

      In other words, this type of income statement calculates potential assets or liabilities based on a certain set of predictions. The results can vary significantly depending on previous data and future price predictions.

      Elements of a Pro Forma Document

      Pro forma statements have almost all the same elements as traditional financial statements.

      For instance:

      • A pro forma balance sheet will still cover assets, liabilities, and equity.
      • A pro forma income statement will still look at sales, the cost of sales, and expenses
      • Pro forma statements will still list details for the client and seller and information about the transactions.

      The main difference between a pro forma financial document and other financial documents is the source of the data. With the pro forma system, most of the data comes from economic reports and assumptions based on the financial forecast.

      Proforma Invoice – Contents

      A proforma invoice should contain the same elements as any other invoice, namely:

      • A title
      • The business name
      • The business contact information
      • The client’s name
      • The client’s contact information
      • The invoice’s creation date
      • The invoice’s expiry date
      • A comprehensive list of typical costs and anticipated expenses

      How to Create a Pro Forma Invoice

      Now that you know what a proforma invoice is, let’s consider how to make your own.

      Some fantastic tools on the market use submitted information to create pro-forma documents automatically. Whether you need a balance sheet or an invoice, these tools can make them for you.

      However, this type of application can be costly, and doing it by hand still gives you the most control.

      Creating a Pro Forma Invoice or Statement – Step by Step

      You can use many free invoice templates to help you create a pro-forma document. We recommend taking advantage of one of these, as it will simplify the process immensely.

      Whether you choose to go digital or to use paper invoices, the following steps still apply:

      1. Calculate all the costs, including labor and other expenses, that will impact your product or service. It’s essential to list every expected expense, no matter how small, so the client knows exactly what to expect.
      2. Create your invoice, ensuring you add all the elements listed in the proforma invoice contents list above.
      3. To protect your business, add complete terms of agreement. This legal support is essential since proforma invoices are theoretical documents, and only some predictions may be accurate.
      4. Send the documents to your client, and come to an agreement that suits both of you.

      Uses of Pro Forma Financial Statements

      Pro forma financial statements have an array of uses. Primarily, these kinds of documents help provide insight into the health of your business, both historically and in the future.

      You can use past trends to make financial assumptions about future transactions and the viability of a proposed transaction.

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      They’re also valuable for investment. If you plan on investing some of your business funds, you could use a capital investment pro forma projection to help see the potential benefits and risks.

      You could also use this kind of document as a form of risk analysis for future periods and to study past cash flow to determine your future cash flow.

      Limitations of Pro Forma Financial Statements and Invoices

      Because they rely mainly on theory and hypothesis, pro forma statements also have some limitations.

      While you can make a relatively accurate prediction of the price increases or decreases on certain products, others may catch you by surprise. Even a relatively minor alteration in predicted finances can overwhelmingly affect the overall results.

      Pro forma statements also have a lack of adjustability to inflation. This rigid nature means that, in certain situations, even your best calculations may be inaccurate.

      Final Thoughts

      Proforma invoices and other tools (like a pro forma balance sheet or pro forma statement) can be incredibly useful to help make wise business decisions. However, they’re entirely theoretical in nature.

      If you offer the kind of service where proforma invoices, and other documents that rely on financial predictions, are helpful, always ensure that you have legally binding terms of agreement. Doing so will protect you and your business if any predicted expenses need to be revised.

      While proforma documentation is fantastic for enticing potential investors or clients, it’s always a good idea to cater for the worst-case scenarios.

      Chad Deatherage

      Chad Deatherage

      Chad is a serial entrepreneur and founded Payment Savvy in 2011 armed with the goal of providing high-risk establishments with a pioneering and tailored payment processing solution that allows them to flourish. Having decades of knowledge in the financial services and debt recovery industries, he ensures every client receives the same level of expertise, resourcefulness, and strategic vision no matter the size of the organization. Always willing to push the envelope, Chad’s forward-thinking and leadership skills are responsible for Payment Savvy being on the map as an industry-leading payment processor.