Gross Sales vs Net Sales: Key Metrics Explained

Learn how to use the sales revenue formula so you can gauge your company’s continued viability and forecast more accurately. Gross sales refer to the grand total of all sales transactions over a given time period. This doesn’t include the cost-of-sales or deductions (like returns or allowance). As the net sales take into account the costs directly arising from the sales process, more business owners use this figure to guide their decision-making process. Your company’s income statement is broken out into three parts that support the analysis of capital costs, direct cost, and indirect cost. The direct costs portion of the income statement is where the net sales can be found.

Essential for Tax Reporting and Compliance

When it comes to measuring business performance, it’s important to understand the difference between gross revenue vs. sales and revenue vs. gross sales. Gross revenue represents the total income generated by a business, while sales refer to the revenue generated from selling products or services. To calculate your company’s gross sales, add up the total sales revenue over a set period of time.

Why is there a need to track and understand gross vs. net sales?

• But even a high-grossing business can collapse if expenses balloon out of control.
• At Sunwise Capital, we understand that an astute awareness of this can fuel strategic planning.
• While gross sales refer to the revenue generated by a company, gross sales volume is the number of products sold to generate this number.
• Compare your own figures with competitors to see how you’re performing in the marketplace and identify new opportunities and areas of improvement in your existing sales processes.
• By highlighting the bottom line, it reflects how efficiently a business manages all aspects of its operations, from production to overhead costs.
• Net sales are relevant for assessing a company’s overall health and sustainability by accounting for deductions.

Sales discounts apply to any early payment discounts which are offered to customers when they pay an invoice within a specified period. Here, we focus on the money made from selling things, which is called “sales.” But, not all money from sales stays with the company. This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes. Now, at the time of purchase, the seller does not know how many buyers would make early payments.

How to create a sales process flowchart: 4 steps to streamline your sales

For companies that record the deductions, the gross sales and net sales will have to be recorded separately. In this article, you will learn everything you need to know about net sales and gross sales. You will learn about the differences between these two metrics and how to calculate them. You can also use net sales to set meaningful goals for your sales team. Determine how much more revenue your company needs to hit sales targets, and set realistic quotas for reps based on those metrics.

Your early-payment discount is impacting revenue

Breaking down these figures helps analyze the amount linked to gross sales, while net sales offer a clearer picture of actual revenue generated. Aligning sales strategy with the insight gained from gross vs. net sales can leverage the strategic benefits of knowing your company’s true performance. As a company committed to helping businesses thrive, we understand that evaluating company performance is pivotal. Grasping the difference between gross sales and net sales is crucial for any company’s financial health. On the other hand, revenue and gross sales are similar terms that represent the total income generated from sales. However, revenue may be calculated after deducting any returns, discounts or allowances.

On the other hand, gross margin is the revenue that you have after subtracting the cost of goods sold (COGS) and dividing the number that you have by your revenue. Gross margin is given in percentage rather than in monetary amount, and the higher it is, the better your company is generating profit. The gap between your gross and net sales shows how well your sales team is performing.

If a company only considers gross revenue, it may overestimate its financial strength and allocate resources inefficiently. When you run a small business, “money in” and “money out” is the name of the game. Ever hear the terms “gross income” and “net income” and wonder which figure truly represents your profitability? It’s easy to confuse the two—or assume they’re basically the same thing. In reality, each number tells a different part of your financial story.

It’s like the amount of cash a company ends up with after a garage sale, once all the costs and returns are sorted out. This part is super important for understanding if a company is doing well. When combined, both metrics can give you a proper representation of your company’s performance, the success of your sales methods, and the quality of your services and products. If net sales are the only metric that gives an accurate picture of your company’s profit, why do you need to track gross sales? There are four important reasons to track gross sales, and here’s a brief roundup of those. Despite the importance of calculating gross sales to get accurate net sales, this metric doesn’t reveal much about a company’s financial position.

This is like if you sold a toy but then had to take it back and return the money. These deductions are taken away from the total sales to gross sales vs net sales get the net sales. It’s very important because it tells us the truth about the company’s sales, not just the grand total of all sales before any returns or discounts. Allowances are price reductions granted for issues like minor product defects or late delivery, without requiring the return of goods.

• Did you know that Walmart’s global net sales amounted to 642.6 billion dollars?
• But they’re not the only sales metrics you should analyze and monitor regularly.
• Gross revenue gives an overview of total income, while net revenue provides a clearer picture of what the company actually retains after expenses.
• Delving into insights into rolling forecasts can provide a robust framework for creating more resilient financial models, ensuring businesses remain adaptable to unforeseen changes.
• Analyzing gross and net sales helps guide your decision-making process.

Yet, to truly gauge efficiency and profitability, businesses must look under the hood and examine net sales. Relying on gross sales or net sales alone without comparing the two together can mislead you while evaluating your company’s performance. For instance, you could’ve made a large number of sales, only to have customers return them later on. You’ll only know about this if you compare your gross and net sales together.