Companies face a significant volume of paperwork and information at the start of any sales or service transaction. Estimates and invoices are some of these essential documents. So what is the difference between the two? A very basic approach is that one is prepared based on preliminary assumptions, while the other is issued after the successful delivery of goods or services.
This blog post provides a deep overview of invoice vs estimate giving a broad definition of each document pointing at their role in the sales process and company’s operations.
How the Purchase Process Looks Like
Before we dive into the difference between invoice and estimate, let’s cover the basic steps of the purchase process.
- A client in need searches for a service or good required. As a seller, you can provide the approximate cost, and supply time estimate upon request.
- A client estimates proposals from potential suppliers and choose the most appropriate terms.
- Once the supplier is chosen, negotiate and approve the purchase order.
- A payment estimate is sent to a client.
- When the payment is received and the service is provided, invoice is generated and sent to a client
When to Use Estimate
The purpose of an estimate is to help a business plan for and successfully complete projects. Here are the two typical explanations of when and why your company should rely on estimates.
A Customer Has a Specific Set of Needs
When a customer has detailed, specific requirements but is not yet ready to commit, an estimate provides a preliminary cost without binding either party. Just write down general ideas if what a project entails and keep adding more details as you go
Customer’s Expectations are Unclear
An estimate is useful when a customer’s expectations are not fully defined and thus you can’t fully estimate the amount of resources required to complete the order. It is almost inevitable that the cost, timetable and other key factors will change that you can easily reflect in the estimate
When to Use Invoice
The purpose of an invoice is to request payment from a customer upon successful completion of services, specify the payment due dates and enlist services or goods provided. Here are three typical cases why and when you should send an invoice.
To Request Payment for Provided Services
Once a service has been provided, an invoice is sent as a formal request for payment, specifying the amount due and the payment terms. It is a legally binding document that includes the due date, cost, items, and other details of the purchase that a business sends to a customer.
Wonder what information your invoice should contain? This 9-step guide will lead you to a flawless invoice.
Keep Track of the Company’s Sales History
Invoices serve as a record of sales, essential for managing a company’s finances and tracking its performance over time. It helps to keep track of when a product is sold or a project is completed, and the total amount of income earned.
You Need to Track Future Revenue for Tax Filings
Invoices help in forecasting revenue by documenting completed transactions that contribute to your company’s income. Invoices serve as a trustworthy data source during tax audits and as a supplement to the information you provide on tax forms. Besides, you will need to present invoices as legal proof of your company’s operations when registering for VAT in Ireland.
Invoice vs Estimate: Comparison Table
| Estimate | Invoice | |
|---|---|---|
| Definition | An estimate is a comprehensive document provided to a client, outlining the anticipated cost for goods or services offered. It’s up to the potential client to either accept or decline this estimate based on the projected charges. | An invoice specifies the goods or services delivered to a customer or small business, including the total charge and preferred payment method. |
| Timing | Before proceeding with contractual agreements, a business provides a customer with an estimate, allowing them to gauge the expected costs. | Following the conclusion of a project, whether it involves selling goods or providing services, a business generates an invoice where the payment due date is clearly . |
| Adjustments | It represents an estimated figure for the overall cost and the expected duration for completion, subject to some degree of variation. | This document is definitive, created upon project completion and incorporates all relevant project details. |
| Legal power | Not legally binding, presented for the client’s awareness of the approximate costs and deadlines. | Legally binding, should only be presented when you’ve agreed on the sum and due date of payment. |
To Sum Up on the Difference Between Invoice and Quote
Both invoice and estimate are essential for the successful completion of any business transaction with a client. The biggest difference between the two lies in the timing of generation and the legal power. While estimations are presented at the beginning of the negotiation process are not legally binding, invoices are generated upon successful completion of the project and act as a formal request for payment.
Disclaimer: The content of this page is for acquainting purposes only and is subject to change. It does not constitute any professional advice. No liability is accepted by Chern & Co for any actions taken or not taken in reliance on the information set out in this article. Professional, legal or tax advice should be obtained before taking or refraining from any action.
