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What Does Estimate Mean and How is it Different From Invoices?

When it comes to the financial aspects of your business, knowing invoicing and estimation terms and understanding the differences between them is crucial to stay organized and on top of things.

In this article, we’ll break down invoice vs. estimate, two terms that may get mixed up every once in a while.

What Is an Estimate?

An estimate is just what it sounds like: an estimation of what a product or service will cost to the customer.

This document normally includes line items broken down to show the details of what is included in the cost, as well as a total amount, and a bill to line. Delivering an estimate to a customer doesn’t require anything of them.

Estimates are normally provided to help customers make informed decisions, and to help your business understand the details of an upcoming project or mandate.

What Is an Invoice?

An invoice is also a document divided into line items, a total amount, and a bill to line.

The big difference is context: invoices are given to customers in order to tell them exactly what amount they owe to your business, and for what.

Delivering an invoice to a customer establishes the obligation on their part to pay it within a certain time frame. Invoicing is what allows your business to get paid in a timely manner for the product or service you provide; it is a call to action to make a payment for services or products rendered.

What is the Difference Between Invoices and Estimates?

Despite reading the definitions of invoice vs. estimate, you may still be confused about the difference.

If both documents have the same line items, and maybe even the same amount, why aren’t they considered the same thing?

There is one essential difference to keep in mind: an invoice is a formal document that shows an amount owed by your customer. The total amount listed on the invoice must be paid, whereas the total amount on an estimate is not owed by the customer yet.

An estimate is usually given to a customer so that they can see how much the product or service would cost them, before actually going through with the purchase. It is the mechanism by which customers make the decision of working with you and committing to an engagement.

Once that engagement is confirmed, an invoice represents a request for payment for the line items described.

Why Offer Estimates?

You may be wondering, why waste time providing an estimate to a customer?

If the customer still has the option to go with a competitor, it may feel futile to work on an estimate for a potential client. However, the truth is that offering estimates has many benefits to your business. Here are a handful of them:

#1 - It Helps Create a Strong Client Relationship

Providing an agreed-upon, detailed document that explains every deliverable and every cost helps to ensure that there are no misunderstandings between you and your clients.

With an estimate, there are no surprise costs or miscommunications: everything is clearly explained right from the beginning and expectations are established early-on.

#2 - It Helps You Make a Decision

Depending on what kind of industry you’re in, you may discover that certain projects and mandates are not profitable.

Having the ability to compare and contrast associated costs to make decisions is only possible by itemizing each element involved in the delivery of value. The act of reviewing line items confirms that value is being transferred, and provides the prospective customer a quantified metric by which to judge that value.

#3 - It Helps You Prepare

In every respect, preparing an estimate helps you prepare for the project ahead of you.

You’ll be able to check if you have enough cash flow, when the estimated date of completion may be, and every step that you’ll need to take if the customer decides to work with you. It’s a means of grounding the scope of your project so you can be certain you’ll come out profiting from the work.

Let’s go over what we discussed in this article:

In the end, understanding these two essential terms will help you stay organized both for your customers and for your business.

Offering estimates can help your customers make more informed decisions and help you understand an upcoming mandate. It’s a great element of any successful business, so invoices vs. estimates are two terms that you should know like the back of your hand.

Posted on November 9, 2020

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