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Purchase orders and proforma invoices are two commonly used documents in business transactions. But do you know the difference between the two? A lack of understanding of PO and PI can affect your procurement business and even lead to being deceived by suppliers.
Don’t worry, in this article, we will provide you with knowledge about purchase orders and proforma invoices. This will equip you with the industry insights you may need in trade.
What is a Purchase Order and Proforma Invoice?
A Purchase Order is a formal and binding agreement initiated by the buyer, while a Proforma Invoice is an initial bill or quote given by the seller, often used for customs and preliminary financial arrangements.
Definition of Purchase Order
Purchase Orders serve as a formal document from a buyer to a seller, outlining the details of a purchase. And detailing the products or services the buyer agrees to purchase at specified prices and terms.
PO includes information such as the buyer’s and seller’s details, item descriptions, quantities, pricing, terms, and delivery instructions. The purpose of a Purchase Order is to ensure clarity and agreement between both parties before any goods or services are provided.
Note: The purchase order you provide to your supplier should include comprehensive details.
If you don’t specify exact product parameters, the supplier might make mistakes in the details, leading to unsatisfactory products.
For example, if you want to purchase stainless steel kitchenware, there are many types of stainless steel, and it’s unclear which material the supplier will use.
Stainless steel types include 304, 316, 430, 446, etc. Suppose you need kitchenware made of stainless steel 304, but if this is not specified in the PO, the supplier might use stainless steel 430. This could significantly reduce the quality of the product.
You can’t blame the supplier, as they will argue that you didn’t specify material requirements in the order.
Definition of Purchase Invoice
A Proforma Invoice is a preliminary bill of sale sent by a seller to a buyer before the transaction is finalized. It serves as a request for payment and records the transaction from the seller’s perspective.
A Proforma Invoice provides an estimated cost of the goods or services, including pricing, terms, and other relevant information. When you receive a proforma invoice from the seller, you should confirm the detailed information about the transaction.
In short, you can think of a proforma invoice as a sales quote, but it is not the final sales invoice. Please remember, a proforma invoice is not a real invoice.
A sales quote is prepared in the form of a pro forma invoice, which is different from a commercial invoice. 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, but because a pro forma invoice is not a legally-binding document, the price may change in advance of the final sale.
From: Wiki
Why is Purchase Order and Proforma Invoice Important in Business?
1. Ensuring Clear Communication and Agreement
Purchase Orders and Proforma Invoices provide a clear understanding of the buyer’s expectations and the seller’s obligations. They serve as a reference point for both parties, reducing the likelihood of miscommunication or disputes.
2. Streamlining the Procurement Process
These documents streamline the purchasing process by specifying the necessary details upfront. They help buyers and sellers stay organized and ensure a smooth flow of goods or services.
Moreover, a proforma invoice provides the buyer with a clear breakdown of costs, facilitating clear communication between both parties about sales terms and expectations, thereby establishing and maintaining a healthy business relationship.
3. Record Keeping and Auditing
These documents provide a paper trail for transactions, which is vital for accounting, tax purposes, and audits. They help in validating expenses and revenues. If you forget some information about the product, at least you still have a way to look it up.
4. Establishing Legal Protection
A purchase order serves as an official and legally binding document that outlines the buyer’s intention to purchase specific goods or services under agreed terms. It helps prevent misunderstandings by clearly specifying quantities, prices, and delivery details.
Note: Does a proforma invoice have legal binding power?
No! A proforma invoice does not have the legal binding power of a contract.
However, we still recommend that both the buyer and seller sign the proforma invoice because, in case of any issues with the transaction, this document can still serve as important evidence of the transaction.
Components of a Purchase Order and a Proforma Invoice
1. Key Elements of a Purchase Order
A Purchase Order (PO) typically contains the following key elements:
- Purchase Order Number: A unique identifier for tracking and reference purposes.
- Buyer’s Information: Name, address, and contact details of the company or individual making the purchase.
- Seller’s Information: Name, address, and contact details of the company or individual providing the goods or services.
- Date of Issue: The date when this purchase order was created.
- Description of Goods or Services: Detailed list of items being purchased, including product code.
- Quantity: The number of units of each item being purchased.
- Price per Unit: The cost of each item.
- Total Cost: The total amount to be paid, including a breakdown of taxes.
- Delivery Date: Expected date or time frame for the delivery of goods or services.
- Shipping Method and Costs: Details about how the items will be delivered and the associated costs.
- Additional Terms and Conditions: Any other specific terms or conditions agreed upon by both parties.
2. Essential Information in a Proforma Invoice
A Proforma Invoice generally includes the following essential information:
- Proforma Invoice Number: A unique number for identification.
- Seller’s Information: Name, address, and contact details of the entity issuing the invoice.
- Buyer’s Information: Name, address, and contact details of the entity to whom the invoice is issued.
- Date of Issue: The date when the invoice was generated.
- Description of Goods or Services: Detailed list of items being offered, including quantity and price.
- Total Value: The total estimated price of the goods or services, including taxes and additional charges.
- Delivery Terms: Terms under which the goods will be delivered (often referenced by Incoterms like FOB, CIF, etc.). For further information, read this article: Basic Trade Terms Alibaba Incoterms
- Validity Period: The time period for which the proforma invoice is valid.
- Bank Details: Information for payment, if bank transfer is a mode of payment.
- Additional Information: Any other relevant details, such as warranty, quality certifications, or special instructions.
How to Create a Purchase Order and a Proforma Invoice (Using Templates)?
Creating Purchase Orders and Proforma Invoices doesn’t have to be a complex process. With the help of templates and tools available, you can efficiently generate these documents. Here’s a basic step-by-step guide:
- Gather the necessary information: Collect all the relevant details, including buyer and seller information, item descriptions, quantities, pricing, and terms.
- Choose a template: Select a suitable template from the available resources or utilize software that offers pre-designed Purchase Order and Proforma Invoice templates.
- Input the details: Fill in the template with the gathered information, ensuring accuracy and clarity in every field.
- Review and finalize: Double-check all the details and ensure that all the necessary components are included. Once satisfied, save the document and share it with the respective party.
Remember, these documents can be customized based on your specific business needs and requirements. Utilizing software or online tools designed for creating Purchase Orders and Proforma Invoices can simplify the process even further.
Differences between purchase order and proforma invoice
| Aspect | Purchase Order | Proforma Invoice |
| Purpose | A formal document issued by the buyer to the seller indicating the intent to purchase specified items. | A preliminary invoice issued by the seller to the buyer presenting expected prices and terms for the sale. |
| Function | Details types, quantities, and agreed prices for products or services; a formal proposal to buy under stated terms. | Serves as an estimate or quote, outlining potential costs and terms; not a demand for payment. |
| Legally Binding Nature | Becomes a legally binding contract when accepted by the seller, outlining the buyer’s commitment to buy. | Not a legally binding contract; serves as a pre-sale document for estimating costs. |
| Role in Transaction | Initiates the buying process, indicating the buyer’s desire to purchase and under what terms. | Used for customs in international trade or as a preliminary bill of sale; assists in financial planning and securing financing. |
| Content and Details | Contains the purchase order number, buyer and seller details, description of goods or services, quantities, unit prices, total cost, etc. | Includes invoice number, products or services offered, unit prices, total charges, estimated taxes, etc., similar to a commercial invoice. |
| Financial Management | Critical for financial planning, budget management, and inventory control; authorizes | Helps in financial forecasting and assessing potential expenditures; not typically used for inventory |
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Final Thoughts
Purchase orders and proforma invoices help both the buyer and seller specify their requirements in a transaction. The buyer can clearly understand the costs involved, and the seller can learn the specific parameters of the product through the purchase order. This is beneficial for both parties.
Owlsourcing Action，
Members of Owlsourcing assist clients in confirming specific product specifications.
Of course, if you still have questions about sourcing, you can contact Owlsourcing. We assist clients in determining purchase orders and proforma invoices with suppliers, ensuring a smooth procurement journey.
2 thoughts on “What is a Purchase Order and Proforma Invoice (PO & PI)?”
Great article! I want to make sure I get it right in my business transactions. Thanks for the helpful information!
Hey AssistanceR. Thank you very much for your positive feedback and support!
I’m glad to know that this article was helpful to you in your business dealings. If you have any questions or require further guidance, please feel free to contact us. I wish you success and satisfaction in your business dealings!