Net sales and gross sales are important financial metrics for businesses to track. Both metrics provide valuable insight into a business’s performance, thereby painting a picture of where a business is going.
If you’re not sure what these metrics are and how they differ from each other, you’re in the right place.
In this article, we will explain the basics of net sales and gross sales to help you understand the distinction between the two.
What Are Net Sales?
Net sales refers to a business’s total sales revenue generated over a specified period of time after subtracting allowances, discounts, and sales returns. In other words, net sales is a business’s gross sales minus the cost of allowances, discounts, and sales returns.
How To Calculate Net Sales
The formula for net sales is:
Net Sales= Gross Sales –Sales Returns-Allowances-Discounts
Let’s define the terms that constitute the net sales formula.
- Gross Sales-This is the amount of sales a business generates over a specified period of time, unadjusted for sales returns, allowances, and discounts.
- Allowances-These are grants given to customers on account of damaged goods, defective goods, wrong goods sent, and other reasons other than discounting.
- Sales Returns– These are product items that are returned in exchange for a partial or full refund. Sold items can be returned due to late shipping, defective products, incorrect product specifications, wrong items shipped, excess quantity shipped, etc.
- Discounts-These are rewards a business extends to customer’s invoices when certain conditions are met. For example, if you offer your customers a 30-day invoice period, you can extend a 5% discount if they make payment within 15 or 20 days.
An Example of the Net Sales Formula
Suppose a book store sold 10,000 books over the financial year, with book retailing for $15. However, they gave out allowances worth $10,000 and discounts of $7,000 and had sales returns worth $10,000.
Using the net sales formula, the net sales for this bookstore is:
Net Sales= (10,000 x $15) – $10,000 – $7,000 – $10,0000 = $123,000
Benefits of Knowing Your Net Sales
Net sales helps businesses to get a better idea of their performance and financial health. Businesses can also use this metric to measure deductions, discounts, and returns for purposes of making the necessary adjustments towards profitability.
What Are Gross Sales?
Gross sales refers to the total sales a business makes within a specified period of time without accounting for any deductions. That is, the total number of units sold multiplied by sales price per unit. Knowing your gross sales helps you to track your sales volume. However, this metric is not a good measure for decision making.
Benefits of Knowing Your Gross Sales
Gross sales gives insight into the total amount of revenue a business generates during a certain period of time. Using gross sales, you can measure how well your sales team is doing and how they can take their sales game to the next level.
Gross sales and net sales are important metrics to track in order to make informed decisions.