Everyone knows that sales are important to any business. They’re the whole reason your company exists! However, what you might not know is what Net Sales are, how to calculate Net Sales, and what the difference between Net Sales vs Gross Sales is.
How Do You Calculate Net Sales?
Net Sales are your Sales total after you’ve deducted Allowances, Discounts and Returns. So the Net Sales formula would be:
Net Sales = Gross Sales – (Allowances + Discounts + Returns)
Gross Sales mean the total value of all sales you have made during the period you’re calculating Net Sales for.
Allowances are Deductions in price that are granted to customers after a sale has been completed, often because of a defect or another problem with the product or service. Discounts are upfront amounts (usually a percentage) that customers are offered to reduce the price of an item. Finally, there are Returns, which of course, are Sales that were completed but had to be reversed because the customer returned the item they purchased.
What Is An Example of Net Sales?
Let’s assume that for a predefined sales period, you made sales that total $100,000.
One of your clients complained about late delivery, and your sales team granted them an allowance of $3,000 on their order. Another customer got preferential pricing that reduced the value by giving them a discount – this resulted in a reduction of the sale value of $2,000. You have also had one customer who returned their order, which was worth $5,000.
In this case, the formula for Net Sales would be:
Net Sales = $100,000 – ($3,000 + $2,000 + $5,000)
Of course, this means that the Net Sales made during this period were $90,000.
What Are Net Sales vs Gross Sales?
We already know that Net Sales are Gross Sales less allowances, discounts and returns, but we also need to know what Gross Sales are.
Gross Sales are also known as Revenue or Turnover. It’s the total amount of sales you have made during a particular period.
Your accounting team will track Revenue in the Profit and Loss report based on orders received and invoices that are issued, so it should be pretty easy to find out what your Net Sales for any particular period are.
Do Net Sales Mean Profit?
If you are new to Accounting, you might think that Net Sales and Profit are the same things, but that’s not true. While you do make some deductions from Gross Sales to calculate Net Sales, you will not be accounting for any expenses that were incurred to manufacture products or deliver services.
So there is still another calculation you need to do before you will know how much Profit you have made.
Why Is It Important to Track Net Sales?
You might be wondering why it’s important to track Net Sales for your business.
While Net Sales don’t give you the full picture of your Profitability as a company, it does give you a snapshot of how you are doing in the marketplace and whether your business is growing, declining or stagnating.
You can compare sales figures for this year with previous years like in this free template, which will give you a good indication of what your growth, year over year, has been.
If you consistently add the same margin or markup to your quotes, and your productivity and input costs have not changed, you can also estimate what your Profit will be based on Net Sales. So this is a quick way to ensure that you’re making money – although it’s not completely accurate.
Many companies base their planning around Net Sales. Since they know what kind of Profit they should make and they know how much money they need to earn to stay afloat, they can calculate what kind of sales volumes they need to make per month, quarter and year.
How to Track Net Sales
Most modern accounting software like QuickBooks allows you to track Net Sales in pretty much real time.
As you enter invoices into the system, it will automatically deduct any discounts from them, so you’re left with the net amount.
Likewise, every time you enter a credit note to give customers an allowance, it will be deducted from your Gross Sales figure, and if there are any returns, they’ll also be tracked in real-time.
This is why it’s so valuable for companies to use the right kind of accounting software. It helps to ensure that you have important financial figures faster, so you can plan better.
If you’re not using accounting software, you will need to do more work to track your Net Sales. It also means that you will need to make any adjustments manually since you won’t have access to real-time information as it happens.
This is just another reason why you should be using the right kind of financial software for your business!
What Other Reasons Are There to Track Net Sales?
Very often, if you want to get a business loan, or if you are hoping to sell your business or even turn it into a franchise, you will need to know what your Net Sales are.
In these cases, you will probably also have to provide information about Expenses, Liabilities and Profit. Still, since Net Sales are a good indicator of how a business is doing (particularly when they are presented for several years and there is significant growth), it will be a big factor.
So, when you get right down to it, Net Sales are somewhat of a barometer of how your business is doing. If you’re making enough sales and provided your pricing is accurate, you should make enough Profit and cover all your costs.
That means you have a healthy business, and you’re getting things right. So congratulate your sales team, and keep doing what you have been. It seems like you’ve got a winning formula!