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All about Estimates in business

Updated on :  

08 min read.

Estimates or proforma invoices help businesses give price quotes to customers before the sale can take place. This article provides complete details about estimates.

Meaning of an estimate for invoicing purposes

An estimate refers to a non-binding document that a seller sends to a buyer intimating the pricing for products or services that interests the buyer. An estimate depicts the amount that the seller wants to charge for goods or services yet to be supplied to a potential customer. 

It is an informal document usually used during the initial stages of sales. It is also a way to agree or negotiate on the price and scope of work before it commences. It is also known by the names such as cost estimates or proforma invoices or bids. 

Due to its nature as a non-binding document, the buyer may opt out of the sale transaction without worrying about any repercussions. The buyer may call for an estimate even before a quotation is raised. Further, there are cases where the buyer may want to go directly with the invoice by the seller. Hence, the issue of estimates is not mandatory under any law but is a good business practice. 

Uses and benefits of an estimate

An estimate gives information about the items or services by the seller to the buyer with the predicted prices.

A customer usually requests estimates from various sellers or service providers to select the best offer that works for him in a particular market. It is allowed due to the nature of an estimate that it does not bind the parties involved in it.

It is essential for businesses, especially MSMEs, to stay competitive and attract potential buyers, customers or clients. If the estimate is appealing enough, it helps in securing a deal or sale. It enables the buyers to know the average price in the market for a particular product or service. Further, it allows sellers to know their competitors’ price quotes and how much they are willing to charge.

The following are the benefits of using estimates-

  • To get quotes in a market for a particular product or service.
  • Estimates represent sales orders.
  • Allows prepayments or deposits or retainers.
  • Acts as a document for collecting the approval of the buyer to go ahead with an order.
  • Promotes calculation of price estimates for a job or project.
  • A change in any of the details does not require revision of the estimate or is not a final sales invoice.

Who should use estimates?

The use of estimates can be seen in different situations and across Indian industries. Estimates are popular among businesses of all sizes and supply chain levels, such as manufacturers, wholesalers, retailers, or other intermediaries. However, estimates are most commonly used in project-based jobs such as construction, design, contracting, etc.

Format and contents of an estimate

Estimates must contain all the necessary cost elements of a specific project specified by a potential customer. Such costs should reflect the seller’s best judgement of the total price due if the parties proceed with the sale transaction.

The following are the fields to be included in the format of an estimate-

  • The word ‘Estimate’ or ‘proforma invoice’ must be mentioned as the document’s header.
  • Seller’s business name, logo, address, tax identification number, and contact details.
  • Corresponding details of the buyer or customer or business receiving the estimate.
  • The date of issuing the estimate.
  • The list of items offered with quantities available for supply.
  • Estimated rate and price for every item of goods or service offered.
  • A total of estimated prices of all items in the estimate.

ClearOne is a cloud-based invoicing software that allows businesses to create and share professional invoices, estimates, e-invoices, and e-way bills safely and securely.
A sample format of an estimate as generated from the ClearOne invoicing software is given below-


What happens after the issue of an estimate?

When the seller issues an estimate, the potential customer may either accept the estimate, negotiate the prices and scope of supply, or even decide not to go ahead with the transaction. If the potential customer agrees with the estimate, he will create a purchase order. The seller will supply goods or services per the purchase order and issue a standard or tax invoice.

Comparison between invoice and estimate

The following are the key similarities or differences between an invoice and an estimate:

Point of comparisonInvoiceEstimate
MeaningFormal document with the products or services, pricing, scope of work, including the due balance or the amount owed by the customer.Non-binding document with the products or services, pricing, the scope of work, including the amount to be owed by the customer, if they go ahead with the transaction.
Time for issueAnytime after the supply commences or at the end of a sale transaction.Before the beginning of a sale transaction.
Accuracy of value or priceExact calculation.Rough calculation.
Effect due to changesAny particulars of the invoice can be revised by the issue of credit notes or debit notes.The issue of another fresh estimate to alter any particulars of the estimate based on negotiations.

Comparison between quotation and estimate

The following are the key similarities or differences between a quotation and estimate:

Point of comparisonQuotation or QuotesEstimate
MeaningNon-binding documents to provide projected rate and price for a particular job or supply after entering the supply contract.Non-binding documents that provide the projected rate and price for a particular job or supply before entering a supply contract.
ImportanceMore important for a business.Less critical when compared to quotes.
Frequency of useMore frequently used between two parties.Less frequently used between two parties.
PricingInvolves a fixed price offer that cannot be changed once accepted by the customer.Involves an approximate price which could be subject to change.

ClearOne Invoicing software allows users to convert estimates into invoices with a click of a button. Create one estimate and convert it to many other documents such as an invoice, e-invoice, and an e-way bill compliant with the GST law. Explore now.