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Pro forma Invoices: A Smarter Approach for Better Accounting Practices

Every now and then, we tweak a thing or two at Spiderz. This time, it’s ‘invoices.’ And, they’re going pro forma or ‘for the sake of form.’ What? Well, … our invoices will arrive labelled, “PRO FORMA”, ‘as a matter of form’, ready to be paid. Once payment is received, an “INVOICE” shall duly follow.

Starting April 1st, 2023, we’re switching from sending invoices, to sending pro forma invoices. In this blog post, I walk you through the reasons behind changing to pro forma invoicing, the key differences between invoices and pro forma invoices, and how this change benefits both, our clients, and our business.

Let’s start by discussing the differences between invoices and pro forma invoices.

A pro forma invoice is like a snapshot of the future—it’s a preliminary document that gives you an idea of the goods or services you’re about to purchase, along with the anticipated prices, quantities, and sale terms. Think of it as a pre-sale agreement or a way for you to negotiate contract terms before the actual sale happens. Keep in mind, pro forma invoices aren’t legally binding and aren’t typically used for tax or customs purposes. So they can be easily updated if something needs to change on them, like say, you want to order something more or less of, or want to change quantities. Stuff like that. Ah yes, discounts too!

On the flip side, a regular invoice is the real deal—a legally binding document that gives you a confirmation of the goods or services you have purchased. It’s got all the nitty-gritty details of the transaction, such as the items sold, their quantities, prices, and payment terms. This invoice is a confirmation of the transaction and serves as a record of the sale for both the seller and the buyer. It’s also used for tax and customs purposes.

Now, let’s dive into the challenges we’ve faced in the past when using regular invoicing.

We send out hundreds of automated invoices for services that our clients order or have active with us and renew in time. The problem? These invoices are sent out BEFORE clients make any payment, causing a handful of issues:

  • Higher tax liability: We submit VAT to the UAE’s Federal Tax Authority every three months and unpaid invoices bump up our tax liability, i.e. our VAT returns are higher.
  • Complicated cash flow management: Having invoicing without payment creates difficulties in managing cash flow due to the need to account for unpaid VAT.
  • Difficulty in tracking and reconciling unpaid invoices: Unpaid invoices add a layer of complexity to our financial tracking and reconciliation, since they are recorded as accounts receivable.
  • Making changes is harder: If clients delay payment beyond the upcoming VAT stagger, it’s impossible to change invoices, without incurring additional costs or administrative burdens.

By moving to pro forma invoicing, we can tackle these issues head-on and make our invoicing process smoother:

  • Lower tax liability: Issuing pro forma invoices for unpaid services will help us avoid unnecessary VAT liability. We’ll only need to submit VAT on paid invoices.
  • Better cash flow management: Pro forma invoicing will make it easier to manage cash flow since we’ll only be accounting for VAT on completed and paid transactions.
  • Simpler tracking and reconciliation: Pro forma invoices won’t count as accounts receivable, so our financial tracking and reconciliation processes won’t take a strain.
  • Crystal-clear communication: Pro forma invoices will set the stage for clear expectations about services clients need to order and their costs, leading to faster payments and fewer back and forth.

The invoicing to pro forma invoicing change for us is as simple as a flick of a switch.

Our billing system Blesta comes with built in functionality to begin issuing pro forma invoices. On March 31st 2023, right after 10:00 A.M (which is when Blesta would generate the last few invoices for this financial year) we’ll flick the switch.

Starting April 1st, no pun intended, we’ll be sending out pro forma invoices marked as “PRO FORMA INVOICE”. On successful payment, we’ll be issuing invoices marked as “INVOICE.” We’re confident that this switch to pro forma invoicing will help us run like a well-oiled machine and give our clients, an even better experience.

If you’re a fellow business owner or manager thinking about making a similar change, take some time to assess your current invoicing practices and think about the benefits of pro forma invoicing. Remember, it’s always a smart move to consult a legal or financial expert who is familiar with the tax laws and regulations in your jurisdiction before implementing any significant changes to your invoicing process.

I hope sharing this tweak to our invoicing practices has been both helpful and enlightening for you. As we continue to grow and learn, it’s essential for us to keep everyone in the loop about the changes we’re making to better serve our clients. In due time, we’ll share our experiences and results in a future blog post, allowing you to see how this change has impacted our operations and if we’ve encountered any challenges along the way. Thank you for being here with us.

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