When it comes to making invoices for use, it seems that we are all more or less clear about what they are, how they are used and what for. But when we get a billing program and it gives us the option to create delivery notes, budgets and proforma invoices, the doubts begin.
In this article, we are going to try to shed a little light on what are the main differences between a pro forma invoice and a budget.
What is an invoice?
A proforma invoice is a document whose use is very widespread among freelancers and employers. This is usually used as a draft before issuing the final invoice. It is very common to use proforma invoices for international trade.
It is mandatory that the words “proforma invoice” appear on it. It is important to remember that the proforma invoice has no fiscal or accounting validity. This means that a proforma invoice is not a substitute for an invoice and therefore a service or advance cannot be charged using a proforma.
Does the proforma invoice have to bear VAT? Although as we have already said a proforma has no tax value, it is recommended to include VAT so that the client can see the real value of the goods or services.
The proforma invoice differs from the budget in some respects. Both documents can be used for a similar purpose; but generally, they have a number of key identifying elements.
Among its similarities we can highlight that both the proforma and the budget are documents that lack fiscal or tax validity, and therefore cannot be used as supporting documents for the Treasury.
Of course, both are supporting documents regarding the terms set in the agreement, such as the price, transportation costs, the operations that will be part of the final transaction, etc. In this way, they may be useful in the event of discrepancies once the initial conditions of the operation have been accepted.
What is a quote?
A quote is a document or offer (which can be open or closed) about the terms (such as payment terms) and the price of a good or service.
It is quite common that a budget is open to negotiation with the client. As a general rule, the professions in which the use of budgets is habitual do not offer closed prices but are adapted to the characteristics and situation of each individual client.
Like the proforma invoice, the budget has no fiscal or accounting value. This is why you can neither collect an advance on a budget nor charge a good or service.
In most cases, quote are made by individuals or companies that offer a service that does not have a fixed price, so it is vitally important to strike a balance between being competitive and not devaluing work. Only in this way, the budget will be moderate and taken into account by the client. To make a balanced budget, you have to take into account that costs are covered, that there is a profit margin, the market price, and possible promotions.
What is the difference between a proforma invoice and a quote?
Typically, a proforma invoice involves a more developed business relationship between the customer and the seller than a quote. The nature of the budget is more that of an offer that the client can accept or not, while the proforma invoice is more “closed”.
It is usual for the final invoice to coincide with the proforma, while compared to the budget, there may be a greater discrepancy in the terms or even in the final price.
In the price or tariff negotiation process, normally a budget is sent first and once the client gives the approval to said budget, a proforma can be sent to the client as a “draft”.
In turn, the use of proforma invoices is more common in international trade, often used to declare goods at customs. It is also common for some clients to request a pro forma invoice in order to request bank financing.
To conclude, it is important to understand that a budget or a pro forma cannot replace an ordinary invoice, since they do not have fiscal validity. Normally, the budget is associated with a more open business relationship and the proforma with a more developed and formal relationship.
Perhaps the most obvious difference between both documents is that the proforma will contain a formal image and an invoice format, with all the details of the transaction well broken down: supplier and issuer tax data, base price, VAT, etc.
The only difference with an ordinary invoice is that the proforma contains a different serial number and a special heading in the upper area of the header, to indicate that it is not indeed a document with tax validity.
However, the budget does not have to contain an invoice aspect, and in many cases it can even be formalized in an email, without the need for a specific document.
For this reason, in certain sectors such as international trade in which transactions require special security between the two parties to the operation and, therefore, a more formal document is required to prove the conditions of the agreement, the pro forma invoice is usually the means preferred to set the details of the operation.
On the contrary, in work areas where less formality is required, the budget is usually a simpler way to detail the transaction.
Which is better
It can be said that none is better since each one serves a purpose and should be used in a certain situation. In conclusion, the main difference between the two is that the budget is a less formal document, which has no validity beyond the word of the person presenting it; and the proforma invoice, is a document that contains clearer, more advanced and relevant information about the operation that will be carried out between both parties, and that will have to be respected in the event that the agreement is carried out.
As you can see, it is easy to decide between a proforma invoice or a budget, depending on the information you want to give your client, and the degree of commitment you want to maintain with him.