Net sales are the result of gross sales minus returns, allowances, and discounts. They are a factor in gross profit but do not include costs of goods sold. A wrong calculation of gross sales figures would ultimately impact the calculation and accuracy of the net sales figure of an organization. On the other hand, a wrong calculation of net sales figures will not impact the calculation and accuracy of the gross sales figure.
- If you’re trying to determine whether your business needs to change how it approaches its sales efforts or improve its product quality, you’ll likely need to consider both figures.
- From sales funnel facts to sales email figures, here are the sales statistics that will help you grow leads and close deals.
- But if you’re offering 10% and your competitors are offering 5%, you can still offer 7% to reduce your loss of revenue and still beat your competitor.
- In contrast, net revenue reveals how much of your gross revenue remains after accounting returns, refunds, and discounts.
- Without looking at your gross revenue over the same period, you can’t tell whether your business’s net income is changing because of fluctuations in sales or expenses.
- In this case, the company might offer the retailer a 2% discount for paying off the invoice sooner.
On the other side, the company’s net sales are calculated by subtracting the value of returns, discounts, and the allowances of the period from the value of the gross sales of that period. The company’s gross sales are calculated by multiplying the number of units sold during the period by the selling price per unit. In accounting, a company’s gross revenue is its total gross sales over a certain period of time. It’s all of the money the business received, not accounting for any expenses whatsoever. Net revenue, or net income, is equal to a company’s gross revenue minus all of its expenses, including fixed expenses. Companies that allow sales returns must provide a refund to their customer.
Calculating your gross sales vs. net sales
Thus, if sales are to be reported separately from the income statement, the amount should be reported as net sales. A company may elect to present its gross sales, deductions, and net sales information on separate lines within its income statement. Although gross sales do not accurately represent a company’s profits, they do provide a baseline for measuring important sales metrics. Discounts are reduced prices offered to potential customers in order to motivate them to make a purchase. If the bookstore’s monthly discounts amount to $5,000, then gross sales go down to $116,500. Allowances are price reductions offered to customers who purchased a defective item.
If these discounts are increasing, it means more of your customers are paying their bills promptly. This gives your business a healthy cash flow, but if the discount is too high or if too many customers are using it, it can affect your final sales figure. Gross sales and net sales will feature in your financial statements, specifically as the top line on the company’s income statement . The gross sales amount is ignored in an organization’s income statement, whereas the net sales amount is reported in the statement of income of an organization. While your business’s gross revenue and net revenue metrics are important, they don’t tell the whole story of the company’s financial health.
The difference between gross sales and net sales
In this scenario, a potential investor may decide not to invest even though the company’s gross revenue was increasing. When you can show an increasing trend in gross revenue, that’s a good sign to investors that you’ve found product-market fit. 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. The price the company pays is an allowance and that partial refund is reflected in the company’s net sales. Allowances are typically the result of transporting problems which may prompt a company to review its shipping tactics or storage methods.
Should gross sales be higher than net sales?
The value of the gross sales will always be higher or equal when compared with the company’s net sales during the same period because it is calculated after subtracting the returns, discounts, and allowances from the gross sales.
To calculate a company’s gross sales, add up the total sales revenue for a specified period of time—monthly, quarterly, or annually. On the other hand, non-operational expenses are deducted in the net sales figures. If a company provides gross sales vs net sales full disclosure of its gross sales vs. net sales it can be a point of interest for external analysis. Gross revenue reporting does not include the cost of goods sold and looks only at the money earned from sales by itself.
benefits of knowing your gross sales and net sales
She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands. Bad debt expense is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible. Investors and traders will use their net revenue to calculate their capital gains tax liability for the year; it is usually as simple as subtracting the yearly loss from gains and being taxed on the remainder. Vikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area.
- 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.
- From there, you can calculate net revenue by subtracting the value of the returned shoes.
- This could mean that your product needs redesigning, or that your sales process is targeting the wrong people.
- For sales teams, the biggest concern is if products are returned because they don’t meet the buyer’s requirements.
- However, they can compare it with net revenue to get more information about product quality and the effectiveness of your marketing and sales strategies.
- In accounting, your company’s net revenue is your bottom line – equal to your gross revenue for the reporting period minus all expenses you incurred over the same period.
On the other hand, the net sale of the company is calculated after taking into consideration all these. I.e., returns by the customer during the period, the discount given to the customer against the sale of the product, and allowances related to the missing, damaged, or stolen product related to those sales. The amount remaining after all of those items are deducted is the store’s net revenue. If your gross sales are high but net sales indicate that one of your products is being returned more than usual, you can use this information to identify what’s wrong. Then, you can make changes to provide a better product or service to your customers. When the order has been returned, the refund is credited to the customer’s account.