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Gross Sales vs Net Sales: The Difference and Why You Should Know It

It paints a picture of where your business is going, sets realistic quotas for your sales team and helps you make informed business decisions. Other than a general indication of a business’s financial health, net sales can also be used as a benchmark to compare with other companies of the same industry. Thus, if sales are to be reported separately from the income statement, the amount should be reported as net sales. In the end, both figures are helpful, but net sales show you the true performance of your company and help you improve its profitability. On the other side of the spectrum, knowing your net sales gives you a clear idea of whether or not your products get returned often or if you’re running too many discounts. Net sales are relevant for assessing a company’s overall health and sustainability by accounting for deductions.

It improves your decision-making

To avoid getting overwhelmed, use a sales CRM like Zendesk Sell to keep tabs on all the important metrics. Zendesk automates the measurement of sales metrics so you can focus on keeping your top and bottom lines strong. But they’re not the only sales metrics you should analyze and monitor regularly. Hinal Tanna is a SEO strategist and content marketer, currently working with the marketing team of Salesmate. She has a knack for curating content that follows SEO practices and helps businesses create an impactful brand presence.

You will learn about the differences between these two metrics and how to calculate them. Take note of your most popular products so you can better serve customers with similar products. As we said, gross sales shows your total revenue during a certain period, whether the last month, quarter, or year. If you are looking at Q1 of 2022, then you will gather all sales made during those three months (January through March).

How to Calculate Net Sales

By comparing them to gross sales in February and January, we can see fluctuations in gross profit. From these totals we can subtract deductions, such as discounts, allowances, and returns, in order to see what the net sales were. Tracking gross and net sales and revenue is an absolute must for evaluating sales performance.

This free guide examines three vital steps to establish a measurable sales pipeline that drives repeatable, predictable sales growth. The calculations of net sales can be derived from its different definitions. Discounts are given on sales either based on early payments, bulk purchases, or a good buyer-seller relationship. Knowing how to calculate metrics yourself is a great way to get a better feeling for what the numbers are saying. From the list below, we can see that nomz offers a number of products.

If your gross sales show that you offer sales discounts more than necessary, affecting your net profit, you can make better decisions regarding when to offer them. Gross sales represent the total sales amount before any deductions, showcasing the raw earning potential of a company’s products or services. This amount is the broadest indicator of a company’s sales activity, reflecting the aggregate demand and market reach.

Formula and calculation

• Next year, for example, Casey might reduce her coupon code to 15%, which should add about $7,000 to her net sales.
• However, the company had some downside moments when they had to refund some customers due to damaged goods.
• Because net sales includes revenue forfeited from discounts, it’s a great way to understand the impact discounts are having.
• This is because gross sales doesn’t account for returns, allowances, discounts, and operating expenses.

On the other hand, service-based businesses or SaaS companies have fewer direct production costs. Operational expenses play a more significant role for these businesses. For example, if you are in the manufacturing and retail industries, calculating gross profit is absolutely pivotal to analyse. You need to comprehensively understand production costs and the resulting pricing strategies since these are the bread and butter of your business.

The gap between your gross and net sales shows how well your sales team is performing. If the gap is too large, your team might be allowing way too many sales returns or bringing in valueless deals. Meanwhile, if it’s quite small, it could mean your sales team is performing well, and your profit margin is high. 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. Gross sales are relevant for gauging a company’s market size and total revenue, but they don’t accurately represent its profitability.

Gross Sales vs. Net Sales: Understanding Key Differences

To determine your gross sales, multiply the quantity of products sold by their individual price. For instance, if you sell 200 units at a price of $40 each during the first quarter, your gross sales would be $8,000 for that period. Deductions play a significant role in transitioning from gross to net sales. Each type of deduction directly reduces the revenue figure from gross to net, providing a more realistic picture of the money a company actually receives. These deductions make the difference between net sales and gross sales. If a company does not record sales allowances, sales returns, and sales discounts, their net sales value, and gross sales value will be the same.

You cannot do proper financial accounting for your business without calculating net sales. While your gross sales amount gives you a high-level view of your overall income over a period, it doesn’t tell you much about your business’s profitability. However, you can use your gross sales figure to help gross sales vs net sales determine other important sales metrics, such as your net sales and gross profit margin amounts.

Conducting a comparative assessment of net sales figures can help you identify whether your sales process needs some tweaking or is working well. For instance, if you notice that your net sales is lower than that of your direct competitors, you may need to reevaluate your pricing strategy, product offering, or sales approach. Let’s take a look at an example to illustrate this calculation, sticking with the cybersecurity example we used before.