gross sales vs net sales

Gross sales vs net sales: why should you learn about their difference?

As a sales manager or someone working on the sales team of a company, it is essential to forecast sales accurately. Whether you are a business owner or a sales manager, generating revenue is one of the key goals of the business. That is why it is important to know about gross and net sales.

As a sales manager or someone working on the sales team of a company, it is essential to forecast sales accurately. Whether you are a business owner or a sales manager, generating revenue is one of the key goals of the business. That is why it is important to know about gross and net sales.

If you want an accurate calculation of your business, you need to know the difference between gross and net sales. In this article, I will walk you through what gross and net sales are, elaborate upon the gross and net sales formula, and give you an idea about their benefits.

What Are Gross Sales?

What Are Gross Sales

Gross sales is the sum of the total or grand total of sales transactions done over a period of time. The sales cost or other deductions like allowances and returns are not included in the gross sales. Calculating the gross sales is the easiest part. You only need to add up the total sales revenue generated over a certain time period. You can calculate the gross sales on a monthly, quarterly, and yearly basis.

Read More: 10 Ways to Increase Online Sales

Gross Sales Formula

You can use the formula below to calculate the gross sales amount of your company –

The sum of total sales transactions + sales allowances + sales discounts + returns = gross sales.

You can also calculate the gross sales by following the methods below –

Gross sales formula: total number of units (gross sales price) x cost of each unit

So, if you have sold 5000 units of any of your business products and each of which costs $20, your gross sales would be – 5000 multiplied by $20 = $10000.

What Are Net Sales?

What Are Net Sales

While gross sales are about the amount you have generated before the deductions, net sales are what remains once all the deductions, discounts, and sales are made. A company or business can use these metrics to calculate its profits. The net sales metrics are also mentioned in the income statement of the business.

Net Sales Formula

Use the formula below to calculate the net sales of your business.

Net sales = Gross sales/total revenue – Allowances – Discounts – Sales returns

In simple words, net sales stand for the amount you generate in sales after deducting all the expenses during the sales process.

Now that you understand the meaning of both gross and net sales, it is time to learn the difference between gross sales and net sales.

Why Knowing About Gross Sales Vs Net Sales Is Important?

These two are decisive metrics for handling your business finances and measuring revenue. Not only should you know about gross sales and net sales, but you must also understand their differences. Here are some benefits of learning the difference between gross and sales.

1. Get & Use Accurate Sales Information

Get & Use Accurate Sales Information

You cannot know about only gross sales and make plausible forecasts from them alone. Net sales are just as valuable as gross sales in this respect. Using only one sales number will provide you with misleading numbers for forecasting, especially when you are refunding most of your sales.

Gross sales provide you with data regarding how much your sales team has been able to generate. On the other hand, net sales provide you with the data for performance measurement, understanding sales tactics, and improving product and service qualities.

So, this makes learning the gross sales vs net sales difference relevant.

2. Improved Decision Making

Improved Decision Making

Once you know how to use the right sales insight for the right cause, you will make an informed and strategic decision. That is why you must know about gross sales vs net sales differences.

A huge part of forecasting involves preparing a realistic budget. This is where your knowledge of gross sales and net sales comes into play. You can use those sales insights to allocate your funds and budget properly.

Also, your net sales can inform you about things that gross sales cannot. You might have high gross sales, but the net sales report might show that one of the products is being returned frequently. You can use this data to make strategic decisions about that product.

3. Run A Better Competitor Analysis

Run A Better Competitor Analysis

When running a business, you must have potential competitors who are performing at your level or above. You can take the gross and net sales data and use it to compare it with other businesses in the marketplace. So, in a way, a clear understanding of gross sales vs net sales helps you run competitor analysis.

As an example, if your net sales are lower when compared with your competitor’s, you can conclude that some aspects need investigation and improvement. Doing competitor analysis using these sales figures will provide insight into what needs improvement. It might be the product pricing, the features, or the product quality.

4. Keep Your Sales Team Motivated

Keep Your Sales Team Motivated

When analyzing your gross sales, you will be able to analyze the performance of your sales team. This will help you understand their capacity, quality, and the amount you can achieve next. Also, an understanding of the sales team’s performance will tell you how much each of the sales reps has been able to deliver.

You can use the metrics learned through the gross and net sales data to steer them in a more profitable direction. Even the sales team can stay motivated when they know their capacity and aim higher based on that.

Read More: Gross Sales – Gross Sales Definition And How To Calculate It!

How To Add Gross Sales And Net Sales On An Income Statement?

When making their final revenue statement, a business usually mentions the gross sales at the top. The process usually starts with the company heads declaring their gross profit in that financial year/quarter. The gross profit is often also referred to as total gross profit or total gross revenue.

Then the deduction part comes; this is where different deductions made during the sales process are cut out of the gross profit. The deductions can be mentioned in the income statement or the contra account of the company. Once the income statement of the company is ready, you can use it to evaluate your sales tax and other sales activities in the future.

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