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Small business accountants advising you on all you need to know about Pro Forma Invoices


For many small businesses, especially those operating in the retail sector, the issue of managing pro-forma invoices is becoming an increasingly prevalent matter that can often lead to confusion and unnecessary headaches in the day-to-day management of your small business. As small business accountants we take great pride in taking the stress out of such matters by educating our clients and providing simple guidelines on the micro-management of your small business.

For those of you that are yet to experience the joy of pro forma invoices a quick overview is in order. A pro forma invoice is essentially a document that initiates a commitment between a buyer and seller, more often than not wholesaler and retailer. The pro forma document will always have a list of the goods to be supplied and the corresponding prices of those goods. Essentially the pro forma invoice sets the transaction in concrete in the manner of a confirmed purchase order without an official tax invoice yet being created. Often you may receive a document headed "pro forma invoice" when in reality it only represents a more official version of a quote or delivery docket.

One of the primary reasons for the use of pro forma invoices is the fact that a pro forma document can be used to confirm a transaction before it actually occurs. As a pro forma invoice does not act as an official tax invoice in the eyes of the tax office, it negates any obligation to report the transaction for either GST or income tax purposes until the issuer is certain of the goods being delivered and paid for. It is at this time that a tax invoice can then be issued and the income reported in the financial statements of the business. So clearly delaying the creation of a tax invoice until goods are either shipped or paid for has its advantages. Reduced bad debts and uncertainty over payment being the driving factor that small business owners will most appreciate.

Assuming that a pro forma invoice is being used in the correct manner the document provides a means of confirmation that the purchaser wants the goods being itemised. The key point being that all goods must be clearly described and quantities clearly stated for each type of item to be supplied, even to the point of including product numbers and colours to prevent any confusion. Receiving back a signed or confirmed pro forma invoice from your potential customer is a great piece of evidence in the case of disputed transactions, whether that be over quantities or types of products. This can work to benefit either party to the transaction, depending on the issue at hand.

A pro forma invoice should always detail information that pertains to the issuers terms of payment as well as preferred payment methods. Again, if this is stated clearly and unambiguously on a signed, agreed to pro forma document, dispute resolution is not going to be a long, drawn out process. This step also allows terms of payment to be agreed to before a tax invoice is even issued, rendering the issue and payment of a valid tax invoice a mere formality to conclude the transaction.

Pro forma invoices that detail product prices and quantities must always have a validity date. You cannot leave yourself exposed to a client wanting to activate a transaction based on a twelve month old pro forma simply because the document did not have a "valid to" date clearly stated. Prices change, goods become obsolete or out of stock and this can leave you red faced if a customer comes back to you looking for goods that you can no longer physically deliver, often through no fault of your own. A simple statement on the pro forma similar to "this document and the prices contained therein is valid for a period of three months from the date of issue" will provide some protection to your business from such occurrences.

For those that deal in receiving or supplying goods from overseas this matter is quite critical. Foreign currencies can change dramatically, often overnight, and lead to major pricing discrepancies. Whilst this may, from time to time, be to your benefit it is simply not worth the risk of exposing your business to the variations in foreign currencies.

It will almost always be in the best interests of the issuer of the pro forma to complete the transaction in the shortest time frame possible. Time between issue of the pro forma and the actual tax invoice can result in price changes initiated by the manufacturer that may be a win or loss scenario. Again, certainty in business is essential where possible and keeping the risks of price and currency fluctuations to a minimum will assist your business in reducing its exposure to influences beyond your control.

Finally, one other advantage of receiving a pro forma invoice from your suppliers is that you get their details before committing to do business with them. Information about the business, such as ABN numbers, is quite powerful and allows you to conduct some research into the validity of the business, whether through sourced credit reports or just a simple Google based search.

For those in small retail and online businesses the issue of pro forma invoices is not one that is going to go away anytime soon. It is best to have a firm grasp on the nature of these documents, how they operate, why they exist and what to look out for when either issuing or receiving them. Knowledge is power and having just a little knowledge about pro forma invoices has the potential to empower you in gaining greater control over your business. In increasingly uncertain times, this power is worth much more than its weight in gold to the average small or micro business operator.