Gross sales and net sales
In business accounting, the concepts of gross sales and net sales provide a comprehensive overview of a company's sales performance. The gross sales figure comes from the total income from all sales or total sales revenue, which provides insight into a business's market reach and volume. The net sales number, on the other hand, offers a more nuanced view by accounting for the actual revenue that contributes to the business's growth after adjustments. Both are critical for businesses to assess operational success and strategic planning.
What are gross sales?
Gross sales are the grand total of all sales transactions over a certain period without any deductions. This figure is indicative of a company's ability to generate sales and captures the maximum potential of a business's revenue-generating activities. A higher per product sales price will decrease overall gross sales and a lower per-product sales price will create more sales volume. It's the first figure reported on the income statement and is particularly useful in comparison to net sales. High gross sales and low net sales may point to problems, such as too many product returns, which reduces net sales.
What are net sales?
Net sales reflect the actual revenue that a business has available for expenses and investments. The net sales number is calculated by subtracting returns, sales allowances, and discounts from the gross sales. These deductions are part of everyday business and can significantly impact the financial understanding of a company's performance. Net sales provide a more accurate measure of a company's efficiency in generating revenue.
How do I calculate gross sales and net sales figures?
The process to determine gross and net sales is straightforward:
- Record gross sales: Total all sales transactions for the period without any deductions to arrive at the gross sales figure.
- Adjust for sales returns and allowances: Subtract any sales that were returned or allowances provided for damaged or unsatisfactory goods.
- Account for discounts: Deduct any sales discounts offered to customers to encourage early payments or bulk purchases.
Net sales = gross sales - (returns + allowances + discounts)
A small business example
Consider a local bookstore that has gross sales totaling $100,000 for the quarter. However, during this period, the bookstore also had $4,000 in returns due to damaged goods, gave $2,000 in allowances for a promotional discount, and offered $1,000 in discounts for early payments. To calculate net sales:
Net Sales = $100,000 - ($4,000 + $2,000 + $1,000) = $93,000
So, the bookstore's net sales for the quarter would be $93,000, which is the net revenue that they have to work with for operational costs and future investments.
Why is it important to compare gross sales to net sales?
You can assess a company's financial health by comparing gross sales to net sales. Gross sales give a clear view of market activity and sales efforts, while net sales provide transparency into the revenue that truly contributes to the business's profitability and growth. This distinction helps business owners and stakeholders make informed decisions regarding the company's financial health, strategies, budgeting, and forecasting.
Frequently asked questions
Why are both gross and net sales important to a business?
Both the gross revenue and figures are important because gross sales indicate the company's market effectiveness and sales reach, while net sales show the business's ability to retain revenue after market realities such as returns and discounts are accounted for.
Can a business have high gross sales but low net sales?
Yes, this can occur if there are high levels of returns, allowances, or discounts. It signifies that while a business is good at generating initial sales, there may be issues with product satisfaction or pricing strategies that need to be addressed.
How can a business improve the difference between gross and net sales?
Improving product quality to reduce returns, refining discount policies, and improving customer satisfaction can help a business retain more of its gross sales as net sales.
Is net sales the same as net income?
No, they are different. Net sales is a revenue figure. Net income measures profit.
How can LegalZoom help with improving sales?
We can help you protect your brand with trademark registration and monitoring. A stronger brand presence helps support a higher price point because people will pay more for a brand they know and trust.
As your one-stop shop for small business, LegalZoom also can file required compliance reports for you, freeing up your time so you can focus on improving sales. For example, we can file your annual reports and your Beneficial Ownership Information Report, plus, we can help you determine which licenses and permits your business needs.