Billing a customer can be tricky business under the best of circumstances. Product, quantity, pricing, payment terms, shipping terms and taxes must be correct so there are no questions between you and your customer as to what is owed. If you require payment in advance before a shipment leaves your loading platform, special care must be taken to ensure a smooth flow of funds, thereby allowing products to ship in a timely matter. There should be no surprises when a payment in advance is received if an accurate proforma invoice is issued.

Documentation for Payment in Advance Orders

When payment in advance is required, the shipper must provide the customer with documentation that explicitly spells out what is owed before an order can be fulfilled. This documentation is most often labeled a proforma invoice. The proforma invoice allows the buyer's accounts payable department to issue payment in advance against an actual document and avoids any misunderstanding as to what is shipping and what is owed. While proforma invoices routinely are associated with international shipments (documentation for border crossings, for example), they are useful documents to provide clarity between a seller and buyer who do business under payment-in-advance terms.

Proforma Invoice Detail

A proforma invoice should include all the information a standard invoice would include, such as: purchase order number, product, quantity, weights, price, shipment terms, payment terms, sold-to and ship-to addresses and applicable taxes. It needs the proforma designation, however, as it is a document issued prior to shipment and for accounting purposes is not the final bill of sale. The proforma invoice should also state clear instructions as to where to remit payment. This could be a street address or banking information for electronic payments.

Accounting and the Proforma Invoice

A proforma invoice is not an accounting document. The standard (final) invoice, which is issued after shipment, is the document posted to the seller's accounts receivable ledger. The prepayment funds then are offset with this final invoice. Reference to the proforma invoice number can be made on the standard invoice to avoid any duplication of payment by the buyer.

Knowing Your Customer

Timing is the most critical component of proforma invoicing and payments in advance. A proforma invoice should be issued quickly so your customer can initiate the payment process immediately. Customers may request material release based on a promise that the payment is en route. Your knowledge of your customer will determine if you are willing to take that risk.