Creating Pro Forma Invoices That Recover All Your Export Costs
From the January 2002 edition of Managing Exports
Every export manager knows that a pro forma invoice is, in essence, a price quotation to a potential buyer. What's not so well understood is the role a well-constructed pro forma invoice can play in helping exporters correctly price their products, by accounting fully for all Ïhidden costsÓ that can potentially kill your profit. A common mistake, for example, is simply adding the domestic price for the product to freight, packing, and insurance for a CIF (Cost, Insurance and Freight) quotation. This can result in setting too low a price, since it fails to take into account unavoidable risks, unforeseen costs, and human error.
Pro Forma Invoice Checklist
Every export department should have a checklist of items that potentially belong on the pro forma invoice, which can be reviewed against each transaction. The list should include:
- overseas phone, fax, telex, and postage;
- credit checks and market research costs;
- international promotion, travel, Advertise, trade show participation, translation;
- export packing and labeling requirements.
Other hidden costs that should be on the checklist are those that tend to surface after you've agreed on the price. Depending on the Incoterm quoted, the nature of the product, and the destination country, these may include:
- cost of an export license;
- warehousing or other storage/transport expenses, e.g., consolidation and container rental;
- main carriage;
- precarriage, including port delivery and loading;
- foreign consular, inspection, legalization, or certification fees;
- sales commissions;
- cargo insurance;
- bank fees and expenses;
- For a ÏDÓ Incoterm, on-carriage costs, customs broker fees, import duties, unloading and storage, and value added tax (VAT).
10 Steps in Preparing Pro Forma Invoice
The pro forma invoice should be constructed with the same care you would use in actually invoicing a buyer. Following these 10 steps will help ensure that you've covered all the bases:
- Prepare the invoice on your firm's letterhead or regular commercial invoice, clearly stating it is a pro forma invoice. Assign it a unique number, date it, and include contact information for seller, buyer, and any shipto party different from the buyer.
- State the terms of sale and the Incoterm 2000 (international freight term), as well as the body of law (i.e., CISG) that covers it.
- State the proposed terms of payment.
- Specify a time limit for validity of the pro forma invoice (i.e., 60 days from date of issuance).
- Give an estimated shipment date (date of main carriage transport, not the date the product leaves the factory), usually expressed as a number of days (i.e., 90) following receipt of a conforming PO or L/C.
- Indicate the currency of sale (especially crucial given currency fluctuations in emerging markets).
- List quantity, description, unit prices, total price, and weight (net and gross, in pounds and kilos) of the export goods.
- Separately itemize all items you are adding to the selling price.
- Include an Ïall or nothingÓ clause (i.e., ÏThis offer expressly limited to stated terms and can only be accepted in fullÓ).
- Notify the buyer of any other Ïneed to knowÓ information, such as requirements for an origin statement or product-specific export license.
Following this procedure will do even more than help ensure that you recover all export-related costs. Your pro forma invoices will also define all the contractual elements of a purchase agreement, thus containing all the information the buyer needs to open a Letter of Credit or obtain an import license. In addition, your company's pro forma invoices will signal potential buyers that they are dealing with a professional.