Gross sales and net sales are both important financial figures for anyone who works in sales or analyzes sales information as part of their job. Both pieces of data give valuable insight into a company's overall performance and financial health. Understanding the distinction between gross sales and net scales can help you accurately interpret sales data and make decisions based on the most relevant figures.
In this article, we explain the basics of gross sales and net sales, then provide a comparison of the different uses and characteristics.
What are gross sales?
Gross sales refer to the total amount of all sales receipts added together, reflecting the unadjusted amount of sales income that a company or person makes within a certain period of time. Gross sales include any sales transactions that generate revenue and exclude all costs, expenses and other charges.
They provide an overview of a company's income to create a baseline to help measure the impact of costs and deductions. Gross sales primarily function as a starting point to calculate other financial information because they only focus on the direct relationship between transactions and income.
What are net sales?
Net sales are the amount of revenue a company earns after accounting for all relevant deductions and expenses. Since net sales provide a more complete idea of how much a company spends and earns through the sales process, they are a key figure financial analysts use to understand a business's income and overall financial health.
A company's net sales figure indicates how much it has made from doing business over a certain period of time, allowing stakeholders to make future financial decisions based on the success of their current sales strategy.
Net sales provide business owners, investors and finance professionals with a holistic view of how their expenses influence their overall earnings. You can calculate net sales by subtracting three key deductions from your gross sales figure:
In the context of net sales, sales discounts occur when a customer pays an invoice early enough to qualify for a small percentage discount off of its total bill. Companies offer customers discount terms that specify how much they could save by paying their invoice within a specific amount of time.
For example: A 2/5 net 30 sales discount means that a customer who pays their invoice within five days of a 30-day invoice notice will receive a 2% discount on their total bill.
Businesses usually determine a sales discount policy ahead of time that applies to all customers to simplify the process of calculating net sales and creating consistent client expectations. Customers who pay early contribute to the financial security of a business, so a small percentage discount can benefit both the client and the company.
Sales allowances occur when a buyer is dissatisfied with a product and receives a partial refund. Clients can ask for a price reduction if their order was incorrect, a product was damaged during transit or they discovered a defect in the item. Companies record sales allowances after making a sale and receiving a request for a discount or refund, unlike write-offs, which deduct inventory loss and damages before any of the items are sold.
Many businesses have a return policy that allows customers to receive a full refund if they are not satisfied with a product they purchased. Usually, returns must be made within a certain timeframe, and the date of an item's return influences when the company can record the return as part of its net sales. When a customer returns an item, most businesses charge a separate return liability account and add credit to an asset account to reflect the increase in inventory.
Gross sales vs net sales
Gross sales and net sales both provide insight into how much money a company makes, with gross sales focusing on income and net sales focusing on the overall financial result of sales strategies. Here are some of the key differences between gross sales and net sales that can help you accurately interpret financial information and assess the success of a company:
Because net sales are the combination of gross sales and any deductions, net sales are always lower than gross sales. When making deductions, you always subtract returns, allowances and discounts. Calculating gross sales involves multiplying total sales by item price or adding the amount of all transactions.
Some financial documents simply use the term "sales" when describing sales income instead of specifying net sales or gross sales. Unless a financial report specifically mentions gross sales, the word sales generally refers to net sales. If a business only lists one sales figure, it is probably their net sales because this figure tells stakeholders more about the overall financial status of the company.
Accountants can calculate gross sales right away because they become a part of the accounting record immediately after a transaction. Unlike gross sales, net sales are calculated at the end of a reporting period and often require accountants or bookkeepers to manually adjust financial records. While both gross sales and net sales use the same time frame, gross sales add up gradually while net sales are usually calculated all at once at the end of the accounting cycle.
Interpreting gross and net sales
Business owners and financial analysts often track gross sales and net sales on the same chart in order to compare the difference between the two figures. Net sales are always less than gross sales, but the percentage difference can change over time. A large gap between gross and net sales indicates that a company has a high amount of returns, discounts or other deductions, which could show financial instability or a lack of quality control. A small gap, on the other hand, can represent a stable, efficient company with a low return rate and a limited need for discounts.