As discussed above, a company’s gross sales are calculated by deducting cost of goods sold (COGS) from total sales revenue. Whereas net sales are calculated by deducting discounts, allowances and returns from gross sales. The proportion of net sales to gross sales may be of interest to internal and external stakeholders. If the margin between gross and net sales is particularly large, it may indicate that you have a higher than average rate of returns, or have been giving more discounts to customers than your competitors. This may raise potential concerns about your short-term profitability. Gross sales is the total unadjusted income your business earned during a set time period.
- Net sales is the sum of your gross sales minus any deductions, such as discounts, returns and allowances (we’ll look at these deductions in more detail later).
- Gross sales can be an important tool, specifically for stores that sell retail items, but it is not the final word in a company’s 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.
- This makes it difficult for externally facing analysts to identify the spread between gross and net sales.
- Product returns or discounts incentivize customers to make more purchases and are usually a normal part of a company’s day-to-day operations.
By combining the two, you get a more accurate representation of your current sales performance. This difference is also crucial when needing to pay commissions to sales reps or affiliate marketers. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Suppose an eCommerce store had a total of 200k product orders in the past fiscal year. Net sales is a high-level metric that doesn’t always tell the whole story.
Why net sales are important
It’s also a key metric you need when calculating how profitable you are. If you use gross sales instead in a profit calculation, you’re likely to overestimate your company’s profitability. Net sales is one of the most important financial measurements for retail and ecommerce businesses, because it shows how much revenue you’re generating after accounting for certain deductions.
For example, as net income fluctuates, you can’t immediately tell why. 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. While still quite straightforward, net revenue is slightly more challenging to report because it involves a few more calculations. In accounting, your company’s net revenue best project accounting software is your bottom line – equal to your gross revenue for the reporting period minus all expenses you incurred over the same period. The income statement is the financial report that is primarily used when analyzing a company’s revenues, revenue growth, and operational expenses. The income statement is broken out into three parts which support analysis of direct costs, indirect costs, and capital costs.
The Sales Revenue Formula: How to Use It and Why It Matters
Investigating whether there have been many allowances made or credits issued could tell you that you need to change your production strategies. This is why there are terms like Net Sales and Gross Sales in accounting – so that you can differentiate between all the many similar-sounding words and phrases. This helps to ensure that everyone knows exactly which figure you’re talking about. Gross Sales is the total value of all your orders or invoices for a predefined period, so taxes are included.
- 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.
- From here, the owners can begin to investigate how they can improve operational efficiency and profit per item sold.
- Moreover, you can use gross revenue to compute other financial metrics—such as gross profit—to get an even clearer view of your financial health.
- You might also offer discounts when promoting new products to encourage customers to try them.
- As opposed to the gross sales figure, net sales is the total amount after discounts, returns and damaged goods are removed.
Datarails’ FP&A software can help your company implement automation that can help your FP&A team operate more efficiently and effectively. Datarails is helping FP&A teams all over the globe reduce the time they spend on traditional reporting and planning. The formula above can be rearranged to calculate net sales, as shown below. It’s an important metric to understand because it can give you an overview of how your business is doing. It’s also helpful for understanding trends—if net sales decrease over time, that could be a sign that you need to make some changes in your business. If they change during particular seasons, you can use that insight to plan your stock levels and promotions accordingly.
Net sales – What are net sales?
This doesn’t include the cost-of-sales or deductions (like returns or allowance). 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.
If you spent $18,500 on business expenses, your gross revenue would be $45,000 and your taxable income $26,500. With the current tax rate at 21% of taxable income, mistaking the two figures can cause you to use the tax percentage from a higher initial figure, resulting in $3,885 more in taxes. Most lenders, from your local bank to the SBA to online lenders like OnDeck, look at gross revenue as a minimum qualification requirement for small business loans. This means that like most investors, they want to know more about your potential for bringing in capital to your business. This helps lenders determine how much money is appropriate to lend to a particular business while using your business credit, personal credit, and cash flow to determine your ability to pay the loan back. You’ll want to make sure you understand your net revenue to determine how easily or difficult it will be to service the debt.
Example of How to Use Gross Sales
While price discounting can be an effective way to bring in new customers and expand your target market, you should be aware of the effect it has on your business’s income. Comparing gross revenue with net revenue can help you maintain the balance between aggressive growth tactics and business strategies that are viable in the long run. Investors may look at gross revenue to verify your business model and product offering. However, they can compare it with net revenue to get more information about product quality and the effectiveness of your marketing and sales strategies.
This forces your reps to focus on high-budget and high-quality deals in tandem, motivating them to prioritize big business and high-value business equally. 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. Gross sales allow you to measure the total amount of revenue made by your sales team, whereas net sales are a better measure of performance, sales tactics and product/service quality. 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.
In some cases, your Gross Sales and Net Sales figures could be the same – if you haven’t had to make any allowances, offer any discounts or had any returns for the reporting period. However, your Net Sales figure will always be equal to or less than your Gross Sales figure. In contrast, net revenue reveals how much of your gross revenue remains after accounting returns, refunds, and discounts.
It paints a picture of where your business is going, sets realistic quotas for your sales team and helps you make informed business decisions. Differentiating gross revenue from net revenue is crucial for several reasons. Build beautiful budgets, track and monitor business performance, and give users stunning and easy-to-use dashboards with Datarails.
Is VAT calculated on net or gross?
You calculate 20% VAT by calculating the net amount x 1.20, then you have the gross amount. If you want to know how much VAT is in the amount, you calculate the gross amount / 1.20 = net amount * 0.20. The result is the VAT included.