Gross sales vs net sales: Net Sales: What They Are and How to Calculate Them

Gross sales vs net sales

As a sales manager, you can create a plan around working with other teams to address customer concerns and discuss ways to add value to increase profits. Gross sales and net sales are two common metrics that offer distinct advantages when it comes to gauging revenue. If you’re not sure what they are and how they differ from each other, you’re not alone. It also lets a company hold customers accountable for the state of products they return, the pace at which they do so, and whether they actually purchased the returned goods in the first place.

On the other hand, revenue and gross sales are similar terms that represent the total income generated from sales. However, revenue may be calculated after deducting any returns, discounts or allowances. Accurately tracking and analyzing these metrics can help businesses identify areas for improvement, optimize their sales strategies and make informed decisions to drive growth and profitability. The sum of all the receipts from sales of an entity unaffected by any adjustments is gross sales. Although they have their uses in accounting, presentation, and tax payment, they are not of much use after the net sales have been calculated. At first glance, it may look good, but that may be before the exorbitant discounts, refunds, sales returns, and adjustments, which might not look as good.

Gross sales vs net sales

Download CFI’s Excel calculator to input your own numbers and calculate different values on your own. As you’ll see in the file, you can easily change the numbers or add/remove rows to change the items that are included in the calculation. Use the OKR framework to set goals that empower your team to exceed revenue targets. Understanding the differences between gross and net sales puts you in a good position to spot when sales aren’t going to plan. Let’s take a look at some of the benefits that come with understanding and analyzing your gross and net sales. From sales funnel facts to sales email figures, here are the sales statistics that will help you grow leads and close deals.

benefits of knowing your gross sales and net sales

In the same example, if we consider that the company allows a discount of 1% on sales, i.e., $30,000, and refunds $10,000 on account of warranties, returns, etc. Pipedrive’s revenue management software allows sales teams to track revenue, sales (including gross and net sales) and invoices – all from one location. As well as a general indication of your business’s financial health, net and gross sales can also be a benchmark for competitive analyses. It gives you real insight into your sales performance, which helps you make informed and strategic decisions. For example, imagine that your customer ordered $3,000 worth of your product, but they receive the wrong color. While the product still functions correctly, the customer might ask for compensation given that the delivered goods weren’t as described.

If the deductions aren’t on the income statement, you’ll find them in your company’s contra accounts (an account used in a general ledger to offset the balance of a related account). Allowances are typically the result of transporting problems which may prompt a company to review its shipping tactics or storage methods. Companies offering discounts may choose to lower or increase their discount terms to become more competitive within their industry. The price the company pays is an allowance and that partial refund is reflected in the company’s net sales. However, this is generally more confusing, so net sales are typically the only value presented.

  • For sales teams, the biggest concern is if products are returned because they don’t meet the buyer’s requirements.
  • Unfortunately, as you can see in the example above, it is sometimes ambiguous what someone means when they say “gross” or “net”, so further clarification may be required.
  • This means you can monitor sales performance and set goals that motivate your sales team to focus on the right targets.
  • Net sales are a better measure of how much a business is making through sales.
  • Tracking your gross sales provides a way to measure the total amount of revenue made by sales teams.

One example of discount terms would be 1/10 net 30 where a customer gets a 1% discount if they pay within 10 days of a 30-day invoice. Sellers don’t account for a discount unless a customer pays early so notations must be retroactive. Gross sales do not factor in deductions, while net sales take into account all the costs incurred during the sales process.

Gross sales, sales, gross revenue and revenue

Gross means the total or whole amount of something, whereas net means what remains from the whole after certain deductions are made. For example, a company with revenues of $10 million and expenses of $8 million reports a gross income of $10 million (the whole) and net income of $2 million (the part that remains after deductions). If you know the difference between gross and net sales company-wide, team-wide and individually, you can accurately measure and analyze performance. This means you can monitor sales performance and set goals that motivate your sales team to focus on the right targets. While it can be tempting to rely on gross sales as a measure of performance (as it’s always going to be equal to or higher than the net sales), it can be misleading. If you’ve had to refund most of those sales, you’re not using accurate sales numbers for your forecasting.

  • Understanding the differences between gross and net sales puts you in a good position to spot when sales aren’t going to plan.
  • Net sales reflect all reductions in the price paid by customers, discounts on goods, and any refunds paid out to customers after the time of sale.
  • Usually, there are return authorizations in place to record the reason for a return.
  • The income statement is broken out into three parts which support analysis of direct costs, indirect costs, and capital costs.
  • Gross Sale is a measure of the company’s total sales, be it products or services or both reported by an entity during a particular period, excluding the returns, allowances, rebates, and discounts.
  • Here, we’ll take some time to understand what gross and net sales are, what differentiates the two from one another, and what they can show about the health of a business.

Then, you can make changes to provide a better product or service to your customers. And, of course, you can only calculate the net sales of a business by using gross sales. Tracking your gross sales provides a way to measure the total amount of revenue made by sales teams. In the same view, net sales gives insight into the effectiveness of your team’s sales tactics as well as the quality of your products or services. Using both gross and net sales, you can understand how well your sales team is performing and how they can sell better. Sales discounts — in the context of reporting gross and net sales — are reductions in price a seller of a good or service offers a buyer for immediate or early payment.

Say the operations at the Battery Operated Light Up Hooting Owl Pest Deterrent factory ground to a halt, and the company wound up shipping one of its products to a buyer a month late. By that point, the customer had grown frustrated with the number of pests in their backyard and turned to a company that sold battery-operated, laser-eyed, screeching hawk pest deterrents. Here, we’ll take some time to understand what gross and net sales are, what differentiates the two from one another, and what they can show about the health of a business. Here, we’ve outlined some of the common causes that can increase the distance between gross and net sales, as well as some advice for how to get your sales back on track. For example, a key part of sales forecasting involves setting a realistic budget.

If the difference between the two figures is gradually increasing over time, it can indicate quality problems with products that are generating unusually large sales returns and allowances. In total, these deductions are the difference between gross sales and net sales. If a company does not record sales allowances, sales discounts, or sales returns, there is no difference between gross sales and net sales. A business might start by declaring its gross sales (commonly referred to as gross profit or total gross revenue), then listing the different sales deductions made as line items (which are the net sales). Other companies skip the part of identifying the gross sales and deductions and simply list the net income or net revenue. To calculate a company’s gross sales, add up the total sales revenue for a specified period of time—monthly, quarterly, or annually.

What are net sales?

The journal entry then lowers the gross revenue on the income statement by the amount of the discount. For companies using accrual accounting, they are booked when a transaction takes place. For companies using cash accounting they are booked when cash is received. Some companies may not have any costs that will require a net sales calculation but many companies do. Sales returns, allowances, and discounts are the three main costs that can affect net sales. All three costs generally must be expensed after a company books revenue.

Gross sales vs net sales

Hence, net sales is a slightly more practical sales figure because it represents the value after accounting for adjustments. The difference between gross sales and net sales can also be a valuable indicator of the quality of a company’s product or service. If the discrepancy between the two figures is substantial or consistently growing, there may be issues or deficiencies with the product, making for considerable amounts of returns or allowances. Gross sales is a metric for the total sales of a company, unadjusted for the costs related to generating those sales. The gross sales formula is calculated by totaling all sale invoices or related revenue transactions.

Gross Sales: What It Is, How To Calculate It, and Examples

The only way to know for sure what someone means is to ask them exactly what is included and/or what is deducted from the figure. The terms gross and net are used frequently in accounting and finance conversations. The easiest way to know what someone means is to think about what could naturally be deducted from something.

What Can Gross Sales and Net Sales Tell You

Net sales are a better measure of how much a business is making through sales. Gross sales refer to the grand total of all sales transactions over a given time period. This doesn’t include the cost-of-sales or deductions (like returns or allowance).

As such, each of these types of costs will need to be accounted for across a company’s financial reporting in order to ensure proper performance analysis. Gross sales isn’t a particularly accurate metric when considering the health of a business or its sales processes. If you only consider gross sales — separate from the rest of an income statement — you might see a considerable overstatement of a company’s sales figures. Analysts often find it helpful to plot gross sales lines and net sales lines together on a graph to determine how each value is trending over a period of time. If both lines increase together, this could indicate trouble with product quality because costs are also increasing, but it may also be an indication of a higher volume of discounts.

If a company provides full disclosure of its gross sales vs. net sales it can be a point of interest for external analysis. Net sales is the sum of a company’s gross sales minus its returns, allowances, and discounts. They can often be factored into the reporting of top line revenues reported on the income statement.

If you purchased one of these owls and found that only one of its terrifying laser eyes was lighting up, you might consider returning it. However, you find it’s still deterring a sufficient number of pests, and you don’t want to go through the trouble of sending it back.

If there are minor issues with the delivered product after a sales transaction but it is still usable, the seller and customer might agree to a compromise. Rather than the customer having to return the goods, the seller could propose a partial refund against the paid invoice. In this post, we’ll show you how to calculate your net and gross sales so you can create accurate sales forecasts. We’ll walk you through the formulas, outline their differences and show you how to identify issues or opportunities within the sales process.