Want to let your customers know approximately how much a project’s going to cost them? If so, you need to know the ins and outs of creating a business estimate.
But of course, you’re a busy business owner. You’d rather be creating the estimates and generating money than reading about them. That’s why we’ve put together this list of fast facts about estimates.
Get started by learning what is an estimate; then, dive into our fast facts.
What is an estimate?
Before getting into our lightning round of business estimate facts, let’s talk about what is an estimate in business.
A business estimate is a document detailing how much you plan on charging a customer for a good or service. It breaks down costs line by line (e.g., each cost for providing drywall installation) so customers know where the total is coming from.
Creating an estimate helps you outline the scope of a project, how much it’s going to cost you (in both time and money), and how much you’ll earn.
In short, this document estimates the time, money, materials, and labor needed to provide a good or service.
When a customer agrees to an estimate, they should understand that they’re agreeing to an amount that is subject to change. The final bill (i.e., invoice) might be more or less than the estimated total.
6 Business estimate facts
Ready to start sending out estimates to customers? Want to improve your current estimate process? Take a look at these six facts about estimates to get started.
1. A number of industries use estimates
Not sure if sending an estimate goes with your type of business and industry? There are a number of businesses that use estimates, including:
- Labor-based businesses (e.g., construction)
- Event-based businesses (e.g., photography)
- Wholesalers (e.g., regional distributors)
- Consultants (e.g., marketing firms)
Some larger businesses rely on cost estimators to estimate the time, money, materials, and labor required for a job. You can hire a cost estimator as a consultant or put together your own estimates.
2. An estimate and quote aren’t exactly the same
Sometimes, people use the terms estimate and quote interchangeably. However, they are not the same.
Again, an estimate is an approximate amount of money (aka a best guess) of how much a job could cost. Estimate prices can change as you start performing the work and hit unforeseen hiccups.
A quote, on the other hand, is more exact and binds you (and the customer) to the quoted price. When a customer OKs a quoted price, they’re agreeing to pay you a set, fixed price for the work.
If you provide an estimate, your price could increase or decrease depending on the time and materials it takes you to complete the job. But if you quote the customer, they need to pay you the quoted price.
3. An estimate has a few standard sections
Although not all business estimates look the same, most follow a standard template. That way, customers know what they’re looking at and where to find information. Do you know what to say when sending an estimate?
Knowing how to write an estimate boils down to understanding these standard sections of an estimate. Your estimate should include:
- Your business information
- The customer’s information
- Estimate number
- The date you create the estimate
- Expiration date (if applicable)
- Products or services included
- Price of each product and/or service
- Description of what you’re providing
- State sales tax
- Estimate total
You might also decide to add your business logo and colors to make the estimate more professional and on-brand.
Do the parts of an estimate sound familiar? The sections of an estimate are similar to the parts of an invoice, which is the final document asking the customer for payment.
Here is an estimate example to give you an idea of the typical structure they follow:
4. There are different types of estimates
Again, no two estimates are the same. There are different types of estimates you might use, depending on the situation.
The types of estimates vary in how much detail they give and the accuracy of the total cost. Basic estimate types include:
- Rough order of magnitude (ROM) estimate: Initial estimate that’s put together at the start of a project. The final amount could be up to 25% less or 75% greater than the estimated total.
- Preliminary estimate: An approximate estimate that details the scope of the work. You can create a preliminary estimate to help you solidify your budget to customers.
- Definitive estimate: This is the most detailed and accurate type of estimate because it’s typically prepared later in the project.
5. You need to do something with an estimate after
After sending the estimate to the customer, your work isn’t done. Don’t let your estimate collect digital dust. Instead, you should convert it to an invoice—unless you need to revise or scrap it.
Is the price too steep for the customer? Or, does the customer want additional services added to the estimate?
If your customer needs to scale back on some of the services or products to save money, you can revise the estimate. Likewise, the customer might decide they want to add additional services or products, driving up the price … and prompting you to revise it.
After revising the estimate, send it back to the customer for approval.
If the customer decides they don’t want to move forward with your estimate, you can scrap it. But, it’s a good idea to keep it in your records in case they change their mind later on.
Convert to invoice
Once the estimate is ready to roll, hang onto it. After you’re done providing the goods or services, it’s time to bill the customer. Streamline the process of invoicing your customer by converting the estimate into an invoice.
If you use accounting software with the ability to convert an estimate to an invoice, doing so can be as simple as clicking a button.
If you don’t use software, keep the estimate in your records so you can reference it. Remember to add or subtract any costs from the estimate before sending the final bill.
6. You can simplify a written estimate
Knowing how to write a cost estimate proposal takes time and practice. But once you put together an estimate, you can use the template as a baseline for future estimates.
To further simplify the process of sending estimates to your customers, you can use a work estimate template. A job estimate template is available:
- In certain online accounting systems
- Through estimating software
- As a downloadable template
Do you plan on converting your estimates into invoices, collecting payment through credit cards, and recording the transaction in your books? If so, you might consider using accounting software to streamline the process from start to finish.
Looking for accounting software that lets you create estimates, convert the estimates into invoices, and record payment in your books? Patriot’s Accounting Premium has you covered. Plus, you can customize your estimates to reflect your business’s brand! Get your free trial today.This is not intended as legal advice; for more information, please click here.