One key example is gross sales, which is a fundamental figure that gives a clear image of a company’s performance, but often gets confused with another term — net sales. Using Streak’s versatile pipeline templates, you can organize your sales prospects, categorize them by region, and track how much they’re spending with you. On top of that, you can monitor your gross sales and keep note of your sales deductions, all without leaving the comfort of your Gmail inbox.
- Net revenue is the actual money that you generated from sales during a period of time before taking costs into account.
- Gross sales, however, gives you a clear picture of how your business is performing overall and how many sales transactions are actually taking place.
- For instance, a company implements aggressive sales tactics and discounts to sell more products.
- If you rely on your gross sales only, you risk replacing sold-out products with new ones that maybe customers didn’t actually enjoy.
- Gross sales and net sales will feature in your financial statements, specifically as the top line on the company’s income statement (also known as a profit and loss statement).
Understanding Net Sales
Many investors also report their income, and the difference between net and gross revenue for a small business can have significant income tax repercussions if mishandled. There are many gray areas in both recognition and reporting, but ultimately, all earned income from sales transactions falls into gross or net categories. Understanding the difference between gross sales and net sales is one thing, but tracking them amidst your chaotic business schedule is an entirely different issue. Also, they aren’t the only metrics you need to keep track of in your company. You can’t figure out your company’s net sales without tracking its gross sales first. Having both numbers can help you run an accurate competitive marketing analysis to see how well your business is performing against others in the industry.
How to Calculate Net Sales
It only uncovers the superficial layer of a business’s financial health. Net sales can help you identify problems in your sales strategies and production processes. For instance, they show whether you’re getting an increasing number of product returns, which indicates problems in quality. They also could let you know if you’re overusing allowances or if your early payment discount is impacting your net revenue.
The difference between gross sales and net sales
Another key difference between gross and net sales is their applications. Both numbers are used to reflect different performance indicators within a company. Gross sales are usually written at the top of an income statement since they’re a raw number that hasn’t been subjected to any deductions. Gross sales are the sum total of all revenues that you’ll make from your business within a given period without any deductions. In this scenario, a potential investor may decide not to invest even though the company’s gross revenue was increasing.
Gross sales show the total revenue generated by a business before accounting for various deductions, including taxes, sales allowances, discounts, and returns. It’s the raw income that your company makes in a specific period of time, and it reflects your market presence. To calculate your company’s gross sales, add up the total sales revenue over a set period of time. To ensure that your gross sales calculation is as accurate as possible, you must carefully account for all sales data, which means reviewing all sales data sources.
Everything to Run Your Business
Net revenue, on the other hand, is great for tracking your profitability and provides considerably more insight than simple gross revenue does. 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 determine whether your business’s net income is changing because of fluctuations in sales or expenses. The main difference between gross sales and net sales is the inclusion of returns, discounts, and allowances. That’s why the latter gives a better insight into a company’s financial position.
Gross sales vs. net sales: Key differences explained
- Focusing solely on gross pay can lead to unrealistic budgeting and financial planning.
- If you find a product that’s common in returns, you can decide whether you need to improve it or remove it altogether.
- The gap between your gross and net sales shows how well your sales team is performing.
- This would give you a figure of $8,000 net sales vs. a gross sales figure of $9,000.
- Most industries experience periods of slow sales throughout the year.
Gross sales are the total that you made from sales without taking other factors into consideration. Therefore, your net sales take into account returns, discounts, and allowances. Your net sales, then, are much closer to the actual amount of money you made. When combined, both metrics can give you a proper representation gross sales vs net sales of your company’s performance, the success of your sales methods, and the quality of your services and products. Another major limitation of gross sales is that the metric is really only relevant within the consumer retail industry. Companies that don’t sell goods can’t use it to evaluate their financial health at all.
When you compare the two quarters, you can see that you earned $200k more by offering a discount, even if it meant lower prices and more returns. Finally, calculate the amount of money that you won’t earn from the allowances. In this case, that refers to the $30 discount, which applies to the 3k shoes you sold on sale.
