What is a Purchase Order and Proforma Invoice?

purchase order

Importers issue Purchase Orders (PO) as a formal procedure to state their intention to buy certain products, according to the terms specified in the PO. The supplier should then counter by issuing a Proforma Invoice (PI), stating their intention to sell the products to you according to the terms stated in the PI.

While this may sound like an outdated formality, understanding the Purchase Order and Proforma Invoice issuing process can help avoid severe misunderstandings – leading to quality issues, receiving the wrong product, or delays.

Overview

What is a Purchase Order?
What do I need to include in my Purchase Order?
How do I submit the purchase order to the factory?
Do I need to submit a Purchase Order before each production run?
Why do I need a Proforma Invoice from the factory?
What kind of information should the Proforma Invoice include?
How do I avoid payment fraud?
What is the difference between a Proforma Invoice and a Commercial Invoice?
Can I use the Proforma Invoice as proof of importation value?

Sample Documents

In addition, we also provide sample invoice documents:

Purchase Order Sample
Proforma Invoice Sample
Commercial Invoice Sample

Purchase Order (PO)

When do I need a purchase order?

A Purchase Order (PO) is a commercial document issued by the buyer to the supplier, for example, a Chinese manufacturer, when placing a new order. When your supplier requests you to ‘send your PO’, this is what they’re referring to.

What information do I need to include?

A Purchase Order must include the product name, colors, materials, and quantity. You should also include any references to product specifications, design drawings or material documentation related to that product.

Product information

Below follows a summary:

Product name
Materials
Colors
File attachments
Applicable standards (e.g. EN 71 Part 3)
Quantity (e.g. 500 pcs)

Other information

In addition, you should also include the following information on your purchase order file:

Your company details
Purchase order number
Contact person
Supplier details
Delivery address
Requested delivery time
Incoterms (e.g. FOB)

You can also include the expected unit price. However, notice that the price is not final until the supplier has issued their Proforma Invoice. I still think it’s good practice to set prices, as a way to signal to the supplier that you will not accept large price increases.

What are the benefits of sending a purchase order document?

The PO makes it crystal clear what you want to buy. It specifies the products, variants, colors, and quantity. It’s important to be clear when sending order instructions to a supplier, as even the slightest misunderstanding can result in them manufacturing the wrong product, color, size, or quantity.

How do I submit the purchase order to the factory?

You can submit your purchase order as a PDF attachment in an email. You don’t necessarily need to send a signed hardcopy to the factory.

Do I need to submit a purchase order before each production run?

The Purchase Order is a formality that many importers don’t really bother with. It’s perfectly fine to send your supplier an email requesting them to issue a new invoice, without attaching a Purchase Order.

That said, it’s convenient to submit a document including all relevant product information, delivery terms, and buyer details.

How do I create a purchase order document?

You can use any Word or Google Docs template to create a purchase order. You can also use a spreadsheet. What matters is the information in the PO.

Proforma Invoice (PI)

What is a proforma invoice?

The proforma invoice is a preliminary invoice issued by the supplier, as a response to them receiving your purchase order. As the prices are not confirmed by you at this stage, it’s called a proforma invoice – which is subject to adjustments in terms of pricing and quantity.

Once you accept the proforma invoice, the supplier should issue the actual invoice. That said, many manufacturers simply refer to the proforma invoice as the final invoice.

Manufacturers in China, and elsewhere in Asia, tend to refer to the Proforma Invoice as a PI.

Why do I need a proforma invoice from the factory?

It serves as a quotation or “counteroffer” to your purchase order. Your supplier may not necessarily agree with the unit price and order quantity stated in your purchase order.

This can then be reflected in the proforma invoice. It’s also important for the supplier to summarize the products, colors, sizes, prices, and quantity in a single document.

What kind of information should it include?

The Proforma Invoice normally includes the following information:

Customer details (your company details)
Supplier details
Delivery address
Port of discharge
Product details
Unit price
Bank account details

How do I avoid payment scams?

You must compare the bank account beneficiary details specified in the Proforma Invoice, to the supplier details, to make sure that it’s matching the actual supplier name.

Use this checklist to avoid payment scams:

Is the seller’s name not matching the supplier’s name?
Is the bank account beneficiary not matching the supplier name?
Is the bank account located offshore (e.g. BVI) or outside of the supplier’s country?

If the answer to any of the above is ‘Yes’, then you should not wire the funds to the supplier.

What is the difference between a proforma invoice and a quotation?

A proforma invoice is essentially a quotation. In practice, however, manufacturers in Asia don’t send proforma invoices upon quotation requests, but only once the buyer is close to placing an order.

During an RFQ process, for example, most suppliers respond with a quotation.

The main difference lies is in the information. A proforma invoice includes information you’d expect to find an invoice, such as payment terms, bank account information, and estimated shipping date.

Quotations on the other hand tend to only include basic supplier information, unit prices, and MOQ.

What is the difference between a proforma invoice and a commercial invoice?

The Proforma Invoice is a document demonstrating the supplier’s commitment to sell products for a certain price, under the terms specified. There are often several changes to the terms (e.g. Incoterms), quantity, and price during the order negotiation – leading to the supplier issuing several versions of the Proforma Invoice before the deposit is paid.

Hence, the Proforma Invoice is not a legal document.

The Commercial Invoice, on the other hand, is an actual legal document stating the final amount received by the supplier. Unlike the Proforma Invoice, which is only digital, the commercial invoice is also printed and stamped by the supplier.

Can I use the proforma invoice as proof of importation value?

You can generally not use the Proforma Invoice as proof of the customs value. Instead, the supplier must issue a commercial invoice hard copy, with their company stamp. This document is sent by your supplier directly to your freight forwarder, which will then use the commercial invoice as proof of the customs value.

That said, the customs may accept a proforma invoice as a substitute in case a commercial invoice is not available. But, they may also request transaction records or bank statements supporting the stated value.

This is what the US Customs and Border Protection has to say about this practice:

If a commercial invoice is not filed or available at the time the merchandise is entered, a statement in the form of an invoice (pro forma invoice) must be filed by the importer at the time of entry. The pro forma invoice must contain information adequate for examining the merchandise and determining the duties; Invoice requirements are found in 19 CFR 141.86.