Gross sales: What it is, how to calculate it, and net sales comparison

Misinterpretation of a business’s financial health is a common mistake among business owners and entrepreneurs, and it often leads to unfavorable consequences. One of the most common reasons it happens is accounting for gross sales only. Net sales, on the other hand, show how efficient a business is at generating revenue and how competent a sales team is at dealing with unsatisfied customers. This metric offers more insight into a company’s financial situation than gross sales.

Formula and calculation

This could mean that your product needs redesigning, or that your sales process is targeting the wrong people. In this case, you’ll need to review your ideal customer profile to make sure you’re reaching out to the right people. If you’re experiencing an increase in returns, start by identifying the main cause. Usually, there are return authorizations in place to record the reason for a return. If that’s the case, you’ll be able to see whether there are any opportunities to improve the manufacturing, quality control, delivery and other sales processes to reduce the number of returns. If you know the difference between gross and net sales company-wide, team-wide and individually, you can accurately measure and analyze performance.

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This information can give you a good idea of consumer preferences and buying trends. Because gross sales figures can help you discover a variety of things about your business. There should be no discounts, allowances, or returns included in this figure. The purpose is to get a sense of the overall revenue of your business within a selected period of time. When running a business, keeping an eye on revenue and sales is essential.

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These three deductions have a natural debit balance, while the gross sales account has a natural credit balance. You can just multiply the number of units you have sold by the unit price. So, if you have sold 100 units in first quarter, and the unit price is $50, your gross sales revenue (also called gross profit) for that quarter equals $5,000. 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.

Assessing Sales Performance with Gross Sales and Net Sales

• That’s where the role of a robust CRM, like Streak, can really come in handy.
• The gross sales figure is calculated by adding all sales receipts before discounts, returns, and allowances together.
• First, we need to determine how many of these top four products have been sold.
• Gross sales are an indication of how well or how poorly your sales team is performing because they show the number of total sales they’ve made.
• Using the formulas in this article, you can get a clear picture of your business’s total revenue and cash flow.

In the retail industry, one of the most important metrics to pay attention to is your gross sales. The net sales revenue on your income statement shows how much revenue you have left after the subtractions of allowances, returns, and discounts. In some companies, it might be difficult for gross sales vs net sales a financial analyst to calculate the net sales barely by looking at their financial statements. The income statements will be further broken down into direct costs, capital costs, and indirect costs. If income statements look this way, then the net sales will be under the direct costs.

• Determining your gross sales vs net sales will help businesses get a comprehensive view of their financial landscape.
• For instance, a company may offer a 2% discount to a buyer for paying off an invoice within ten days of receiving it.
• Being able to see the difference between your gross sales, net sales, and profits allows you to determine where you need improvement.
• Plus, if you already know how to use Gmail and Google Sheets, you’re more than equipped to use Streak.
• These three deductions have a natural debit balance, while the gross sales account has a natural credit balance.
• The net sales revenue on your income statement shows how much revenue you have left after the subtractions of allowances, returns, and discounts.

For example, a key part of sales forecasting involves setting a realistic budget. Based on your gross and net sales, you can see where to allocate spending, how much to allocate and where spending might not be necessary. We’ll examine only a few of their self-proclaimed best sellers in this case study. The values in the bracket in the second expression represent the total deductions needed to be removed from the gross value to get the net value. The buyer wound up being perfectly happy with the product it bought in lieu of the one they originally ordered.

Companies adjust for write-offs or write-downs on inventory due to losses or damages. This requires a company to make additional notations to account for the item as inventory. 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, 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.

It can also point up issues you may be having, such as a very high return rate, that affects how much money you end up making. 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. Many sellers require a buyer to produce a sales return authorization number before its receiving department will accept a return. A return authorization number — or RA — allows sellers to track a return from its outset to its end.

How to Calculate Gross Sales

Companies that allow sales returns must provide a refund to their customer. A sales return is usually accounted for either as an increase to a sales returns and allowances contra-account to sales revenue or as a direct decrease in sales revenue. As such, it debits a sales returns and allowances account (or the sales revenue account directly) and credits an asset account, typically cash or accounts receivable. This transaction carries over to the income statement as a reduction in revenue.