Invoicing is part and parcel of how a business operates.
It is how you receive payment for the goods and services you deliver, and invoices are an essential part of the accounting process and record keeping.
For many business-to-business transactions, there are two common types of invoices: a proforma and a commercial invoice.
Both play a significant role in the credit management process, helping you to avoid unpaid invoices and debts mounting up.
At Direct Route Ltd, our team specialises in recovering late payments and overdue invoices, helping your cash flow remain intact, and your business to continue to operate smoothly.
In this post, we delve into proforma and commercial invoices further, looking at the similarities and differences between these documents so you can better understand which one works best for your business, how these documents can support your team, and when these invoices should be issued.
Commercial invoice vs proforma invoice
Proformas and commercial invoices are used to support global trade, where one acts as an estimate, and the other is a request for payment.
Note: If you are importing goods from overseas, you will require proformas and commercial invoices, especially as we see commercial invoices necessary for customs officials to work out and apply the correct duty rates.
Details included in these documents can include:
- Sellers company name, address, and contact details
- Buyers company name, address, and contact details
- Reference numbers, i.e., purchase orders, order reference, etc
- Dates, including delivery dates and payment dates
- Terms and methods of payment
- Description of the goods/services in question
- Any additional information that you feel is relevant.
There is no set or standard format to these invoices; they must be designed however you see fit and meet the requirements of your business processes.
If we look at a proforma invoice first (mainly because a proforma comes first in the credit process), this type of invoice can be thought of as a quote. An estimate for the goods or services in question; no payment is required from a proforma.
It may look like an invoice, but instead, it simply outlines the cost of the products and services, so the customer is aware of the financial costs to them in advance of delivery. The quantity of products ordered and quoted on the proforma can be different from the actual quantity that is then invoiced on the commercial invoice.
Proformas allow you to give your customer a general idea of the costs involved, acting as a sales document confirming the details of an order that may have been taken over the phone, via email, etc.
Proformas are an excellent way to support budgeting and planning, allowing you to manage your cash flow better.
Businesses typically use proformas as a letter of credit to authorise the payment of the
goods, for customs clearance, to apply for a contract, or you can use a proforma if you need to organise finance for the purchase.
Proformas help set the price, which will be valid for a fixed period of time – it won’t last forever, and nor can it be expected to with continuous shifts in the market.
Commercial invoices come much later in the credit process, i.e., once the proforma invoice has been accepted and there is an agreement to move forward with the transaction, a commercial invoice will be issued.
Commercial invoices serve as a legal record for the transaction that has taken place. It will contain more information than the proforma such as:
- The exact quantity of goods that have been purchased and shipped
- The amount owed
- Details of how and when payment must be made
- Information on the buyer and seller
- Description of the goods
Your commercial invoice must contain all of the relevant information to ensure you’re always paid on time. Late payment of invoices is a big problem for many businesses in all sectors and of all shapes and sizes; ensuring that your invoices are correct from the start can help to alleviate this problem.
Proforma invoice vs. commercial invoice
The key differences between a proforma vs commercial invoice are:
When they are issued – a proforma is issued before goods or services are purchased and shipped. A commercial invoice is issued when the sale has been agreed upon, and the goods have been shipped.
The details they include – a proforma invoice includes estimates of the quantity of goods and how much these will cost, whereas a commercial invoice will have the final, agreed-upon details.
How they are used – a proforma is used to provide information, i.e., if you opt for x amount of goods, it will cost you y. A commercial B2B invoice is a request for payment and should include details of the consequences of late payment of an invoice.
Commercial invoice vs proforma invoice
A proforma and a commercial invoice are vitally important documents and form part of your paper trail, making them essential for auditing purposes, ensuring that your products are appropriately declared, taxed, and tracked through the supply chain.
They also form a contract between buyer and seller which can be binding, and this should be highlighted and recognised.
At Direct Route, we understand the enormity and the negative impact late invoice payments can have on business, and we also know the time and resources it can often take to collect these outstanding debts.
That’s why our teams take this pressure from you, working on your behalf to successfully collect outstanding invoices effectively and efficiently.
Call 0330 229 1991 today.