Using a pro forma invoice will help to increase your profits

by Tekle Sebhatu, Ph.D.
STC International

Often when potential importers request a quotation from exporters what do most exporters provide their prospective buyers? Price, quantity and cost of transportation? Payment terms, product availability, shipping instructions and service charges? Terms of sale, description and delivery time? Well, you guessed it, 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 very 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 crucial 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 need 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 in 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.

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 a binding agreement.
• 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 for importers.
• Easily recognized due to their similarity to commercial invoices.
• Their invoice format encourages exporters to include all the information that will appear in the commercial invoice.

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

• The title of the document should clearly say "Pro Forma Invoice"
• Exporter's name, address, telephone number and e-mail address.
• Sold to name, address, telephone number and e-mail address.
• Pro forma invoice reference number.
• Date issued. The date of the pro forma invoice is the date of the quotation.
• Customer purchase order number, if available.
• Terms of payment (letter of credit, documentary collection, pre-payment, T/T, open account etc.)
• Estimated date of shipment.
• If more than one product, number each product beginning with number 1.
• Quantity shipped.
• Full product description, include the Harmonized Schedule (HS) code when available
• Indicate clearly currency used (USD, euro, yen etc.)
• Unit pricing should be included.
• Unit pricing should be extended by the quantities quoted to form the line item total.
• Any additional seller-provided services should be itemized and should be added to reach a grand total.
• Terms of sale using INCOTERMS 2000 (FOB, CIF, CFR, DDU etc.)
• Identify the number of unit measure, weight, case, pallets, box, etc.
• The country of origin of the product.
• Validity period, never make open-ended commitments remember that the validity date can be changed.
• Must be signed and title be included.

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 important 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 sellers, 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 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.
• Vague descriptions.
• Several distinct articles lumped as one.
• Seller does not show the discounted invoice at the net price.
• Omission of royalties, commissions, packaging and other dutiable additions that make up market value.
• Transportation and insurance charges not itemized separately (some countries do not assess duty on transportation and insurance charges).
• Pertinent information missing and lines left blank.
• Missing country of origin.
• Invoices not signed by seller or seller's agent.

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.

Pro forma invoice sample

Reference: US Small Business Administration, Breaking Into The Trade Game: A Small Business Guide.