You kind of have the right idea. Always create a Sales Quote. Then, when you are certain the Sales Quote will become an actual order, create a Sales Order. If you need to order materials to fulfill the Sales Order, you can create a Purchase Order and enter the Sales Order on the Purchase Order so that the Purchase Order and the Sales Order are tied together (for inventory purposes). Process any deposit received by the customer. I usually process the deposit and mark it as a "prepayment" so that it is recorded against the customer's A/R account without being tied to income yet. When the materials are ready to be delivered to the customer, open the Sales Order and create an invoice from the Sales Order. You will need to print one copy of the invoice in order to automatically assign an invoice number to it. Then view "Receive Money" and click on the customer deposit. Change the screen so that it is no longer a prepayment (which will zero out the payment amount - make sure you note the amount received)). Click on the Invoice tax and apply the amount received to the invoice. Close the Receive Money window and open the View Invoice window, click on the customer invoice. You will notice the deposit has been applied to the invoice. Print the invoice.

Note that printing the invoice a second time will print "Duplicate Invoice" on the invoice. To disable this, you need to go into Forms, open/edit the specific invoice you are using, and delete the "box' on the template that prints the "Duplicate Invoice" from the template.

I hope this helps. It is what I do for my clients. It seems to work well for them.

I would like to piggy back on the original question.  Are the items/materials taken out of inventory when creating the Sales Order or does that only happen when the Invoice is actually created?