Do you run a business where you need to provide clients with a quote before they agree to hire you?
But what exactly is a quote, how do you make one, and what happens after a quote is accepted?
These are the questions our guide and video will answer to help you discover what you need to know about quotes.
What is a Quote?
In business, a quote is a financial document that is part of the purchasing process. It is sometimes called a price quote, sales quote or quotation.
Quotes are usually created by suppliers of goods or services and then given to their potential customers. You may have received a quote yourself when dealing with businesses such as plumbers, electricians, landscapers or lawyers.
A quote will usually provide a fixed price that a customer and supplier can agree on for the delivery of the goods or services the customer wants to buy.
If the customer is happy with the price, they will accept the quote and the price will then be locked in.
Is A Quote Legally Binding?
Once a customer accepts a quote and the price is locked in, the supplier now has a legal obligation to provide the goods or services to their customer at the agreed fixed price.
This, of course, creates a risk to the supplier.
For example, let’s say a plumber quotes a customer $200 to install a shower head and the customer accepts the quote. The plumber will buy the shower head from their wholesaler for $70 and install it for the customer.
Let’s say the plumber did not buy the shower head right away, but instead bought it a few weeks later when they were due to install it. During this time, the price of the shower head went up by $20. This means that the plumber now has to spend more money than originally planned to buy the product they need to install for the customer.
Unfortunately for the plumber, they cannot charge the customer an extra $20 because there is a legal agreement for the plumber to charge a fixed price of $200 for the job. This means the plumber will make $20 less profit than originally planned, all because the price of the shower head changed since the quote was accepted.
As you can see, one of the risks with quotes is that things can change in the time between a quote being accepted and the goods or services being delivered.
How to Reduce Risks Around Price Quotes?
To reduce this risk, suppliers should put a time limit on their quotes and should ensure they don’t leave it too long before buying any supplies they need to deliver the goods or services to their customers.
For example, the plumber could send a quote to their potential customer with a fixed price of $200 but only if it’s accepted within 48 hours. Once the quote is accepted, the plumber should immediately buy the shower head they need to install, reducing the risk of the price going up.
What Is the Difference Between a Quote and an Estimate?
First of all, it’s important to remember that an accepted quote is a legally binding agreement. This means that you should ensure your quotes are of a high standard and should contain accurate information.
As a supplier, if you leave important details out, or get something wrong, you may end up being legally obligated to deliver goods or services at a price that will lose you money.
Also, bear in mind that a quote is not the same as an estimate. An estimate is more of an informal guess as to how much a job may cost, so estimates are usually given before a formal quote is issued.
In the above example with our plumber, it’s possible that their potential customer phoned them and asked for a rough guess as to how much it may cost to install the shower head. The plumber may have told them something like “about $200 depending on which shower head you want.” This is an estimate, not a quote, so even if the customer says that they like the price, it’s not legally binding at this point.
However, as you know, once the plumber sends their potential customer a formal quote and it’s accepted, the price will be locked in and legally binding.
How Do You Create a Quote? What Details Should Quotes Include?
Given their importance, it is not a good idea to scribble down a few notes on a piece of paper and call it a quote. This is something you can do for an estimate, as estimates are not legally binding.
Instead, you should use a quote template that contains important information such as your company details and branding, and you should take care to list the description, quantity and price of all goods and services you will provide. You should also include relevant taxes such as GST or VAT and any details of discounts you may be offering.
If you use bookkeeping software such as Xero or QuickBooks, you’ll be able to use their built-in quote templates to create your quotes. You will also be able to email the quotes to your potential customers directly from the system, or download PDFs and get them to your customers another way.
If you don’t have bookkeeping software, you can find quote templates in programs such as:
- Google Sheets
- Google Docs
- Microsoft Excel
- Microsoft Word
Simply find a template you like, add your branding and business details, and use the template as many times as you like for your quotes.
So that’s it for quotes. If you want to learn more about other documents in the purchasing process, check out our videos on purchase orders, invoices and more.
Disclaimer: Our articles and videos are here to inform you and the information provided does not constitute financial, taxation, legal, business or other professional advice and should not be relied upon as such. See our full disclaimer here.