Business owners should know the difference between gross sales vs net sales, as they’re two completely different figures. But each has a role in gauging the performance of your business and decision-making.
Here is a breakdown of what each term means and what they can tell you about the health of your business.
What Are Gross Sales?
Gross sales are the sum of all sales reported in a period without any deductions, or, more simply put, the total revenue a company receives in any form.
What Are Net Sales?
Net sales are calculated by deducting three things from gross sales: discounts, returns, and allowances.
Discounts – Companies frequently discount their prices to stimulate sales or win a bid. Retailers especially tend to run sales discounting their products anywhere from 10% to 50% off the original price to clear inventory.
Another type of discount is an early payment discount. For example, when a buyer pays within 10 days of their invoice due date, you could take 2% off of their invoice amount.
Returns – When customers change their minds about purchases and return them for a full refund, those refunds are deducted from gross sales.
Allowances – If a customer purchases a product and later notices a defect, the company may offer the customer a discount to keep the the product. This kind of allowance is made to avoid having to take the product back and give a full refund.
Net Sales vs Gross Sales – What Are the Differences
Gross sales aren’t a particularly good indicator of the performance of a business or the quality of its sales processes. Net sales provide a better understanding of how effectively a company is selling its products or services. They indicate how well your sales staff is selling the products and the effectiveness of the strategies they use.
The difference between gross sales vs net sales is important to track over time, according to Indeed. A gradually increasing difference could signal quality problems with products that are causing abnormal sales returns and allowances.
Ideally, you’d prefer zero returns, allowances, and discounts, but this isn’t always possible. Therefore, you should monitor these figures to flag negative trends, so you can take immediate action.