Purchase order and Proforma invoice are two essential documents that define a legal transaction . If you are an e-commerce seller, you may know the basics of P.I. and P.O.. However, sometimes, the basics may not be enough. In this article, I will Introduce the things you must know about P.I. and P.O..
What Is Proforma Invoice (P.I.)?
A proforma invoice is a preliminary bill of sale issued by the seller, and the terms and conditions mentioned in this Proforma Invoice can be changed by the buyer. For example, if you as the buyer are not satisfied with the price shown on the P.I., you can negotiate with the seller and change it. As long as you don’t confirm the P.I., then the Proforma Invoice is not binding to the buyer.
Normally, a proforma Invoice may include the following information: Customer details (your company details)
- Supplier details
- Delivery address
- Port of discharge
- Product details
- Unit price
- Bank account details
However, according to the actual situation, the corresponding information will be increased or decreased, for example, some will add Incoterms, thus Information shown on Proforma Invoice can be determined according to the actual needs.
What Is Purchase Order (P.O.)?
A purchase order is a legally binding agreement created by the buyer. The purchase order should clearly indicate the product specifications, price, payment method, etc. The purchase order is a guarantee for the seller, because the full amount of the order is usually paid after the goods are produced, and the binding force of the purchase order on the buyer protects the seller’s rights to a certain extent.
A purchase order should include the following information:
- Product name
- Applicable standards
- Delivery time & address
- Shipping method
Sometimes, you can also include the following information on your Purchase Order:
- Your company details
- Purchase order number
- Contact person
- Supplier details
What Is the Difference Between P.I. and P.O.?
The biggest difference between P.I. and P.O. is legally binding. While proforma invoices and purchase orders contain many of the same details, they perform very different functions. Both are sent before the order becomes effective, but the proforma invoice is sent by the seller and the purchase order is sent by the buyer. Once a purchase order is accepted, it is fully binding, while a proforma form is negotiable and changeable. Thus, Proforma invoices are often discarded once a seller receives an official invoice. In other words, a purchase order is legally binding.
A purchase order is an official document signed by the buyer stating all the details of a new order. After the buyer sends the purchase order document to the seller’s company, the seller will confirm the new order with a proforma invoice document. The order of the two can be changed. In actual operation, you may encounter the following two situations:
- If your supplier offers you P.I first, and you accept their terms and conditions, then you can confirm it with your purchase order. Then the Proforma Invoice and Purchase order work together to lock this transaction. In this case, P.O. becomes binding.
- If you send your purchase order first, and your supplier accept it, then they will send you a PI and confirmed the terms and conditions you mentioned in your purchase order again, in this case, is P.I. binding? Well, we can debate this, because, as I mentioned before, a proforma invoice is a preliminary bill of sale, but in this case, your purchase order acts as an offer and the proforma becomes an acceptance. Therefore, in order to avoid such a controversial situation, it is suggested to sign a formal contract to guarantee the rights and interests of both parties.
Here is an example for you to better understand this case.
Example: If the delivery time mentioned on your purchase order is 3rd, March, however, your supplier can’t accept this term due to production delay, they changed the delivery time into 31st, March and sent the PI to you. Can you hold your supplier for the on-time delivery against 3rd, March as you specified on your purchase order? The answer is no. If you don’t say anything against their P.I after receiving it, then 31st, March is deemed to be the accepted delivery time. Whoever had the last say without the other party disagreement, then that will be deemed to be accepted terms and conditions by both parties.
Proforma Invoice and Purchase Order are both very important documents, and they are also important basis for signing contracts in International trade. If you still have questions in this topic, please contact us for help.