What are net sales?
Net sales are the total sales a business makes after accounting for all deductions during a set period. To calculate this amount, companies look at their total and subtract returns, discounts, and allowances from the total. These calculations are valuable for financial reporting purposes, but it’s important to note that they aren’t always shared externally for transparency reasons.
Many companies report these profits on financial statements, such as income statements, as this calculation represents a company’s financial health. Businesses turn to customer relationship management (CRM) software to manage and collect data for their calculations.
How to calculate net sales
Calculating net sales is relatively straightforward so long as there are solid financial records to rely on.
Net sales formula
The formula for net sales is:
Net sales = gross sales - sales returns - sales discounts - sales allowances
For example, Company X wants to calculate their net sales. First, Company X needs to know the total amount of its gross sales. Then, they need to deduct sales returns, sales discounts, and sales allowances.
Let’s suppose Company X sold a total of $105,000 in gross sales. They had $5,000 in returns, $2,000 in discounts, and $2,000 in allowances. Company X has a total net sales amount of $96,000.
$96,000 = $105,000 - $5,000 - $2,000 - $2,000
Components of net sales
There are four main types of costs that affect net sales. These costs are subtracted from the gross sales of the business.
Sales returns
These costs are most common in retail businesses. Companies allow buyers to return items for a full refund within a specific timeframe. The company must then adjust its finances to account for any returns. There are different ways to indicate a sales return. Some companies may note an increase in returns with an allowance to revenue. Other businesses may indicate a return as a direct decrease in revenue.
Sales discounts
Some companies offer their customers discounts for various reasons, including seasonal profits, discounts for cash payments, and discounted pricing for bulk buying. When businesses apply discounts to their products or services, the price is reduced by a flat number or percentage of the original price.
Sales allowance
Similar to discounts, allowances also impact the original price of a product or service. Allowances are usually deducted in specific scenarios, either for one type of product or service or for an individual customer.
Gross sales
A metric for the total sales of a company, that isn't adjusted for the costs related to generating those sales. This formula totals all sale invoices or related revenue transactions. Gross sales doesn't include the tax expenses, operating expenses, or other charges, which are all deducted to calculate net sales.Why is it important to calculate net sales?
Businesses benefit from calculating their net sales. This calculation is essential for many reasons, including:
- Provides a better view of revenue performance. While gross profit numbers may be exciting, it’s essential to calculate net sales to understand how the bottom line is impacted. High gross sales might look impressive; however, it can be misleading if there’s a significant gap between gross and net. A holistic view offers better insight into the company’s financials.
- Net sales can inform decision-making. Understanding a business’ overall financial health is crucial for making decisions around the strategic direction. Since net sales are included in financial statements, these calculations are key for future financial decisions.
- Can be helpful for motivating sales team members. Having visibility into the difference between gross and net sales can motivate sales teams to narrow the gap. These numbers can also help representatives learn and understand which types of deals to pursue in the future.
Net sales vs. gross sales
Net and gross sales are different, and both paint a unique picture of a business.
Net sales are the total sales value minus returns, discounts, and allowances. This calculation is often seen as a more accurate representation of the financial health of an organization. Gross sales are the total value of sales a company makes without considering deductions. It’s the revenue without any adjustments.
Alyssa Towns
Alyssa Towns works in communications and change management and is a freelance writer for G2. She mainly writes SaaS, productivity, and career-adjacent content. In her spare time, Alyssa is either enjoying a new restaurant with her husband, playing with her Bengal cats Yeti and Yowie, adventuring outdoors, or reading a book from her TBR list.
