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Gross sales: What it is, how to calculate it, and net sales comparison

Gross sales: What it is, how to calculate it, and net sales comparison

min read

Running a business comes with its fair share of challenges, and one challenge that often slips through the cracks is this: learning nuanced financial terms. 

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.

Whether you're a beginner or a professional in the world of finance, confusing the two terms is a common pitfall, so we wrote this article to clear the confusion. To help you through this dilemma, we'll discuss gross sales thoroughly and tell you its definition, how to calculate it, and the difference between gross sales and net sales.

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What does “gross sales” mean?

Gross sales represent the entirety of a company's revenues over a specific period of time without any deductions of business-running costs, like discounts, wages, rent, and more. In other words, the number represents a company’s raw, unfiltered income.

Gross sales provide insight into a company's performance, as they show the total number of transactions. However, this number does not accurately reflect a company's profitability. It only uncovers the superficial layer of a business's financial health.

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The formula for gross sales

The most commonly used gross sales formula is the following:

Gross sales = Total # of products or services sold x Price per product or service

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How to calculate gross sales

To calculate the total gross sales of a company, you need to take into account the total revenue, including three financial metrics: returns, discounts, and allowances. These are the same metrics that make all the difference between gross sales and net sales. Gross sales are calculated without them, while net sales require their deduction (more on this later).

The reason these numbers don't get subtracted from the gross sales of a company is that they get sent to the sales account as credits, not debits.

As such, the subtractions are done when calculating net sales. This is done once the initial gross sales calculation is complete.

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What can we learn from gross sales?

First and foremost, you learn how much total revenue your company can generate in a limited period of time, which helps you track its overall performance and expect periods of slow sales. As a result, you'll be able to put together a better quarterly or annual plan for your company and plan discounts properly.

Another benefit of calculating gross sales is understanding the average consumer spending habits. For instance, you might learn which products your customers are likely to buy during certain seasons. Consequently, you know the right time to market for each product. You also may learn what products they prefer and whether they’d be willing to buy more during discounts or not.

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Limitations of gross sales

Despite the importance of calculating gross sales to get accurate net sales, this metric doesn’t reveal much about a company's financial position. 

For instance, your gross sales won’t tell you much about profitability because they don't include deductions. A company can make an impressive number of total sales, but it doesn't reflect how well it handles costs and how much it gains in profit.

In short, gross sales don't reveal how efficiently your business can convert sales into profits, which is essential for analyzing operational effectiveness.

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.

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What are net sales?

In contrast, net sales are the total revenue of a company after the deduction of returns, discounts, and allowances. Unlike gross sales, net sales don't include any operating costs. Instead, they show the pure profit of a company over a given period of time.

To calculate net sales, all you have to do is deduct the returns, discounts, and allowances from the total gross sales of your company:

  • Returns: These refer to the payment reversals done by customers (when a customer wants to return a product).
  • Discounts: These are deductions in the price of products for the sake of marketing to increase a company's sales.
  • Allowances: These are post-purchase discounts that sellers apply for buyers if their product has a minor defect, in which case the buyer keeps the product but gets a partial refund from the seller.

Here’s a formula to make this easier to visualize:

Net sales = Gross sales - Returns - Discounts - Allowances

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What are the differences between gross sales vs. net sales?

The main difference between gross sales and net sales is the inclusion of returns, discounts, and allowances. Gross sales include them, while net sales subtract them. That's why the latter gives a better insight into a company's financial position. That said, you need both numbers to calculate your company's profit accurately.

As a rule of thumb, the lower the difference between gross sales and net sales is, the better the company's products and customer satisfaction are. If the difference is significant, it's an indication that there's poor quality control within the company.

To properly assess your business's financial situation, you need both numbers. Relying on gross sales alone can be deceptive because you can be making an impressive number of sales without earning an impressive profit.

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Why is tracking gross sales important?

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.

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1. Allows for competitive marketing analysis

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. Gross sales help you better understand your position in the industry and spot areas where you can improve.

For example, if your quantity of sales is way lower than your competitors, you should consider lowering your prices, improving your product quality, or offering discounts as a marketing strategy.

On the other hand, if you're doing better than other companies, you can focus more on honing your strengths. Perhaps you want to raise your prices and have been waiting for the right moment. This is it!

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2. Improves decision-making in sales

Gross sales indicate how well your products are selling, as they show how many goods your company sold during a certain amount of time and how many returns came from customers (which get deducted with the net sales calculation). Seeing these numbers could, for example, flag an issue with a specific product that gets returned often.

If you find a product that's common in returns, you can decide whether you need to improve it or remove it altogether. The same goes for discounts. If your gross sales show that you offer sales discounts more than necessary, affecting your net profit, you can make better decisions regarding when to offer them.

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3. Measures sales team performance

Gross sales are an indication of how well or how poorly your sales team is performing because they show the number of total sales they’ve made. If the numbers are unsatisfactory, you can revitalize them with some sales training topics and tactics.

On top of that, if you calculate net sales and find a large difference between the two numbers, this may indicate that your sales team isn't prioritizing your company’s profit, but rather focusing solely on satisfying customers.

In essence, the numbers can help you determine the strengths and weaknesses of your sales team and work on improving them.

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4. Helps avoid misleading figures and possible issues

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.

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.

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Gross sales example in action

To help you better understand how to calculate gross sales, here's an example in action.

Suppose you own a store that sold 100k products last quarter. If the sale price of your product is $50, here are your gross sales, according to this formula:

Gross sales = Total # of products or services sold x Price per product or service

$5,000,000 = 100,000 x $50

Your store's gross sales for the past quarter would be $5 million.

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Supercharge your sales tracking with Streak

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.

To make your life easier, you should use a reliable CRM tool to help you track all the financial data of your business (especially when it comes to sales metrics), like Streak

This simple Gmail extension comes with built-in integrations and automation to keep you on top of your deals and relevant financials. As a bonus, you can try it for free, and it'll only take 30 seconds to get started!

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Frequently Asked Questions

What is gross sales volume?

While gross sales refer to the revenue generated by a company, gross sales volume is the number of products sold to generate this number. Gross sales represent a monetary amount, while gross sales volume represents a number of items.

Do gross sales include taxes?

Yes, gross sales include all business-running costs, including taxes.

Does gross sales equal total volume?

No, gross sales don't equal total sales volume. Sales volume refers to the number of products sold in a specific period of time, while gross sales are the revenue the company gets by selling these products.

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