What is Net Sales and Gross Sales

Net sales and gross sales are terms that investors and accountants may be more familiar with. Knowing what this means as a sales manager or business owner can demonstrate how your business is performing and help you identify any issues before they become serious.

By understanding gross sales and net sales and tracking how the numbers change over time, you can see what’s holding your sales back and review your processes to improve performance across the business, including your sales process.

In this article, let’s go into more detail about gross sales and net sales. Understanding the difference between net sales and gross sales can help you interpret sales data and make better decisions.

Difference Between Gross Sales and Net Sales?

Gross sales or gross sales are the value of all business sales transactions during a certain period of time without taking into account any deductions. Meanwhile, net sales or net sales are the company’s gross sales minus three types of deductions: allowances, discounts, and returns.

What are Gross Sales?

Gross sales or gross sales refers to the sum total of all sales receipts added together which reflects the amount of unadjusted sales revenue that a person or company made in a given time period.

Gross sales include every sales transaction that generates revenue and excludes all costs, expenses, and other expenses.

Gross sales provide an overview of a company’s revenue to create a baseline to assist and measure the impact of cuts and costs.

Gross sales can primarily serve as a starting point for calculating other finances because they focus on the direct relationship between revenue and transactions.

Gross sales can be an important tool. They can be used specifically for stores selling retail goods. However, that was not the last word of the company’s earnings.

Gross sales are a reflection of the total amount of revenue a business has earned over a given period of time. However, it does not take into account all costs incurred during the process of producing a product that has been sold. Gross sales are usually listed on the income statement or often listed as total revenue.

What are Net Sales?

An income statement is a financial statement used when analyzing a company’s operating costs, revenues, and revenue growth.

Your company’s income statement is divided into three sections that support the analysis of cost of capital, direct costs, and indirect costs. The direct costs section of the income statement is where net sales can be found.

Net sales or net sales is the amount of revenue that a business earns after taking into account all relevant expenses and deductions.

Net sales gives a complete picture of how much a business spends and earns through the sales process. They are the key figures that financial analysts use to understand the financial health and overall earnings of a business.

Business net sales figures show how much a company made from doing business over a given period of time, allowing stakeholders to make future financial decisions based on the success of their current sales strategy.

Net sales are defined as gross sales minus the following three deductions:

Sales refund

Refunds are given to customers if they return the goods to the company. For a variety of reasons, from late delivery to damaged goods, a customer may decide to send the item back and request a refund, and this is a cost you should consider when calculating net sales. The refund amount needs to be deducted from the gross sales.

Sales discount

Businesses generally take this approach if they are in dire need of cash. Payment discounts, such as paying 2% less if the buyer pays within 10 days of the invoice date. The seller does not know which customer will take the discount at the time of sale. Therefore, discounts are usually applied upon receipt of cash receipts from customers.

Sales discounts

This is a reduction in the price paid by the customer for minor product defects. The seller provides a sales allowance to the buyer after the buyer has purchased the goods in question.

If there is a minor problem with the product being delivered but still usable, the customer and the seller may agree to compromise a partial refund against the invoice paid.

In total, this deduction is the difference between net sales and gross sales. If the company does not record sales discounts, sales returns, or sales discounts, there is no difference between net sales and gross sales.

The three deductions are considered contra accounts. This means that they have a natural debit balance as opposed to a natural credit balance for the sales account.

The main difference between net sales and gross sales can be of interest to an analyst. If the difference between the two numbers gradually increases over time, this could indicate a quality problem with the product resulting in unusual perks and large returns on sales.

How to Calculate Net Sales and Gross Sales

Let’s look at the formula and how to calculate net and gross sales:

How to calculate gross sales:

Formula:

Gross sales = Number of units (gross sales price) X Unit price/cost

As defined, gross sales are simply the sum of all sales made. You just multiply the number of units you have sold by the unit price.

So, if you sold 100 units in the first quarter, and the unit price was $50, your gross sales revenue (also called gross profit) for the quarter equals $5,000.

How to calculate net sales:

Net income or net sales seem more complicated to calculate because you need to know all the deductions that have been applied to your sales.

Formula:

Net sales = Gross sales – Subtraction

Gross sales (total revenue) – Discounts – Sales returns = Net sales

The three types of special deductions as mentioned above are – discounts, returns and allowances. Let’s look at each with an example.

For example, your company may send a customer an invoice for 5,000,000 that must be paid within 30 days.

However, you can offer them a sales discount where they can get around 2% off if they pay within the next 10 days (this special offer would be known as 1/20 net 10 in discount terms).

In this case, the customer has to pay 4,900,000, getting a discount of 100,000 for the initial payment.

If your gross sales for Q1 were 9,000,000, but over the same time period, there were 600,000 sales discounts—250,000 in sales returns and 150,000 in sales discounts—this would need to be subtracted from the total. This will give you a net sales figure of 8,000,000 vs. a gross sales figure of 9,000,000.

Benefits of Gross Sales and Net Sales

Terms such as net sales and gross sales are more often associated with companies that sell physical goods, where deductions are due to benefits and customer returns are more likely.

Here are some of the benefits that you will get when calculating gross sales and net sales:

Run a competitive analysis

In addition to a general indication of the financial health of a business, net sales can also be used as a benchmark against which to compare with other companies in the same industry.

If your net sales numbers are consistently higher, this indicates that you are doing something right and you can focus on the strength and growth of your company.

If your net sales figures are significantly lower than your competitors’ figures, this indicates a problem, and your company needs to investigate why.

Better decision making

An important part of forecasting sales involves setting a realistic budget. Because net sales take into account the costs that arise directly from the sales process, more business owners use this figure to guide their decision-making process.

If you base your budget on gross sales alone, you may plan to make decisions such as producing more stock, only to find that the net sales figures are too low. This can undermine your plans and force you to re-examine your sales plans in a way that leads to reduced efficiency.

Avoiding misleading numbers

It is tempting to rely on gross sales as a performance measure because it will always be higher or equal to net sales. This can be misleading.

A high gross sales figure may seem impressive; however, if you have to return the bulk of the sale, then it is deceptive. This can lead to incorrect sales forecasting and planning.

However, gross sales can be trusted, but you should be approached with cautious optimism.

Motivate your sales team

Using gross and net sales as general key performance indicators (KPIs), you can hold your sales representative responsible for the company’s growth and sales.

You can dig deep and analyze your top-performing sales team to see if their gross sales are closer to net sales and whether the team is actually making a worthwhile deal.

Knowing these numbers can help you set the correct gross sales KPI with good-quality leads. This forces your sales team to focus on both high-budget and high-quality offerings at the same time, thereby motivating them.

Conclusion

• Gross sales or gross sales, is the sum of all sales made without deductions and before discounts or returns
• They are generally only significant for companies operating in the consumer retail industry
• Net sales, namely gross sales including discounts (discounts, returns, and allowances)
• If net sales are reported externally, they will be noted in the direct costs section of the income statement
• Changes in net sales will affect the company’s gross profit and gross profit margin, but net sales do not include (the cog) cost of goods sold
• It is helpful to plot gross sales and net sales together on a graph to determine company trends