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Gross sales vs. net sales: Key differences and why they matter for your business

Gross sales vs. net sales: Key differences and why they matter for your business

10
min read

Do you ever get overwhelmed by all of the money talk in business? Gross sales, net sales, revenue, profit — there are so many terms to keep track of. However, with some clear definitions and examples, keeping these terms straight gets a whole lot easier. Understanding the differences between them all is crucial for your company's financial health.

Gross sales and net sales, for instance, are two significant metrics that help measure the success of a business. But too often business owners and entrepreneurs mix them up. While gross sales give the big picture and show all the money coming in, net sales show you how well your company is doing after deducting some expenses.

So while the terms sound similar, they represent different aspects of a company's financial performance. In this blog, we'll help you gain a deeper understanding of gross sales vs. net sales by looking at their formulas and explaining the significance they have in the world of business.

<a href="#gross-vs-net" class="anchor-link">What are the five key differences between gross sales and net sales?</a>

  • <a href="#meaning-definition" class="anchor-link">Meaning and definition</a>
  • <a href="#formula-calculation" class="anchor-link">Formula and calculation</a>
  • <a href="#reporting-statement" class="anchor-link">Reporting and statement</a>
  • <a href="#applications" class="anchor-link">Applications</a>
  • <a href="#relevance" class="anchor-link">Relevance</a>

<a href="#why-matters" class="anchor-link">Why does knowing the difference between gross sales vs. net sales matter for your business?</a>

<a href="#track-both" class="anchor-link">Why track both gross and net sales?</a>

<a href="#track-sales-streak" class="anchor-link">Efficiently track gross and net sales right from your inbox</a>

<a href="#faq" class="anchor-link">Frequently asked questions</a>

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What are the five key differences between gross sales and net sales?

Here's a breakdown of the five ways net sales and gross sales differ.

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1. Meaning and definition

While closely related, gross sales and net sales have entirely different definitions, as highlighted below.

Gross sales

Gross sales show the total revenue generated by a business before accounting for various deductions, including taxes, sales allowances, discounts, and returns. It's the raw income that your company makes in a specific period of time, and it reflects your market presence. However, it doesn't do much to reflect your profitability.

Net sales

As opposed to gross sales, net sales refer to a company's total revenue after deducting sales discounts, allowances, and returns. It provides a more accurate reflection of a company's financial position by factoring in costs associated with operation and production. Overall, it shows a company's profitability and operational efficiency better than gross sales.

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2. Formula and calculation

Gross sales and net sales are calculated using two different formulas. Although they share similarities, calculating net sales includes an extra step, which is deducting. Let's take a look:

Gross sales

Gross sales are the sum total of all revenues that you'll make from your business within a given period without any deductions.

The gross sales formula is as follows:

Gross Sales = Total Products Sold x Sales Price per Product

Say, for example, you were able to sell 1,000 products just this month, and your product's average selling price is $50. Then, the correct gross sales figure of your company would be 1000 x $50 = $50,000.

Net sales

To calculate net sales, you should deduct four important metrics from your gross sales figure. The metrics are allowances, discounts, returns, and taxes.

  • Sales allowances: These are reductions of the selling price to incentivize customers to keep goods that aren't as ordered, either because of minor defects or unsatisfactory performance.
  • Sales discounts: These are also reductions from the standard selling price, but not for defects or issues. Discounts are used as a marketing strategy to boost sales during a short amount of time.
  • Sales returns: These are a return of monetary funds to customers in exchange for the original good they purchased. People make returns either due to defects or unsuitability.
  • Sales tax: These are rates that the government or other level of management imposes on the sales of products and services, and they usually come in a percentage of your product's selling price.

All together, net sales are equivalent to your company's gross sales minus allowances, discounts, returns, and taxes.

The correct net sales formula to use is the following:

Net Sales = Gross Sales - (Allowances + Discounts + Returns + Taxes)

Let’s go back to our $50,000 in gross sales a month example from before. If you assume the total for allowances, discounts, returns, and taxes totals up to $10,000 for the month, you'll subtract $10,000 from $50,000, and have $40,000 as your net sales. This is your “bottom line” if you’ve ever heard that phrase used before.

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3. Reporting and statement

While writing your company's income statement, you don’t just need net sales or gross sales; you need both — and they shouldn't be written on the same line because you’ll want to highlight the difference between them.

Gross sales

Gross sales are usually written at the top of an income statement since they're a raw number that hasn't been subjected to any deductions.

Net sales

On the other hand, net sales should be written lower on the page. They should appear right beneath your gross sales figure after showing the deductions you applied.

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4. Applications

Another key difference between gross and net sales is their applications. Both numbers are used to reflect different performance indicators within a company.

Gross sales

Gross sales are used to assess a company's overall revenue and show customers’ shopping habits. However, they don't reflect how well a company can transform sales into profit.

Net sales

Net sales, on the other hand, show how efficient a business is at generating revenue and how competent a sales team is at dealing with unsatisfied customers. This metric offers more insight into a company's financial situation than gross sales.

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5. Relevance

The final difference we'll discuss is relevance. While gross sales are relevant if you’re tracking big picture market share, net sales are relevant for tracking profitability and internal efficiency.

Gross sales

Gross sales are relevant for gauging a company's market size and total revenue, but they don't accurately represent its profitability.

Net sales

Net sales are relevant for assessing a company's overall health and sustainability by accounting for deductions. They're the right metric to use in explaining a company's efficiency in generating profits from sales.

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Why does knowing the difference between gross sales vs. net sales matter for your business?

If you're unsure why understanding the difference between gross and net sales matters for your business, here are five good reasons.

1. It allows for competitive analysis

Gross sales alone don't provide thorough enough insight into a company's financial health. They only show how strong a company's market presence is. For instance, a company could be bringing in tons of revenue, but if most of it gets returned or discounted, their actual health isn’t so strong. That's why it isn't enough to run a gross sales analysis against your competitors.

Meanwhile, constant increases in net sales show clear company growth, customer satisfaction, and overall better profitability. It's pretty simple: If you have higher net sales than your competitors, then you're doing better. Meanwhile, having higher gross sales doesn't necessarily mean the same.

2. It avoids misleading figures in financial reporting

Misinterpretation of a business's financial health is a common mistake among business owners and entrepreneurs, and it often leads to unfavorable consequences. One of the most common reasons it happens is accounting for gross sales only.

Seeing a high number makes you believe your company is doing well and a large net income is coming your way. However, until you see your net sales, you can't be sure of your financial strength.

3. It improves your decision-making

Knowing your company's net and gross sales improves your decision-making process by a mile. If you rely on your gross sales only, you risk replacing sold-out products with new ones that maybe customers didn’t actually enjoy. You might even raise the prices without studying the market well.

On the other side of the spectrum, knowing your net sales gives you a clear idea of whether or not your products get returned often or if you’re running too many discounts.

In the end, both figures are helpful, but net sales show you the true performance of your company and help you improve its profitability.

4. It inspires your sales team

The gap between your gross and net sales shows how well your sales team is performing. If the gap is too large, your team might be allowing way too many sales returns or bringing in valueless deals. Meanwhile, if it's quite small, it could mean your sales team is performing well, and your profit margin is high.

In essence, you can use your net sales figure as a key performance indicator (KPI) for your team and optimize their training and motivation methods accordingly.

5. It enhances overall performance

Using your gross and net sales figures, you can refine your company's sales strategies, improve your product's quality, and focus on your strength points. Over time, these actions will enhance your company's overall performance and improve your gross profit margin.

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Why track both gross and net sales?

If net sales give you more insight into your company's financials, why do you need to keep track of your gross sales? Here are two reasons why.

1. Gross sales are vital for calculating other sales metrics

While gross sales don't indicate financial health on their own, you can't calculate your company's key sales metrics without them. For instance, you need to know your gross sales to calculate your gross profit margin, net sales, and gross sales volume.

2. Net sales flag potential problems

Net sales can help you identify problems in your sales strategies and production processes. For instance, they show whether you're getting an increasing number of product returns, which indicates problems in quality. They also could let you know if you’re overusing allowances or if your early payment discount is impacting your net revenue.

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Efficiently track gross and net sales right from your inbox

Among all the responsibilities you have as an entrepreneur, tracking your company's gross and net sales might fall off your plate — and that's where Streak comes into play.

Using Streak's versatile pipeline templates, you can organize your sales prospects, categorize them by region, and track how much they’re spending with you. On top of that, you can monitor your gross sales and keep note of your sales deductions, all without leaving the comfort of your Gmail inbox.

And the best news? You can try Streak for free, and it'll only take you 30 seconds to get started.

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Frequently asked questions

What is the difference between gross sales and gross margin?

Gross sales show the sum total of all your transactions in a given time without any subtraction. 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.

What is the difference between net sales and profit?

Net sales are the revenues gained by your company after deducting allowances, discounts, returns, and taxes. On the other hand, profit is the net revenue you get after deducting all expenses that cost your company for production and selling. In general, net sales reflect your company's sales performance, while profit shows its financial health.

Are gross sales the same as revenue?

No, gross sales are slightly different from revenue. While gross sales refer to a company's income from selling products, revenue covers other areas where a company might generate profit, like licensing and royalties. However, this difference is only relevant in companies that don't rely on products solely for profit.

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