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Net sales: Definition, calculation & formula (with examples)

Net sales: Definition, calculation & formula (with examples)

8
min read

Net sales are a cornerstone of financial analysis. They're an indication of how effective your sales strategies are and how well your sales team is performing. No matter how you slice it, they're a key metric for your business.

If you're running a company, you should have a thorough understanding of net sales and how they’re calculated. Good news, we're here to help.

In this article, we'll explain what net sales are, how they're calculated, and what sets them apart from gross sales. If you want to grasp the ins and outs of financial success, keep on scrolling.

<a href="#net-sales" class="anchor-link">What are Net Sales?</a>

<a href="#why-track-net-sales" class="anchor-link">Why Track Net Sales?</a>

<a href="#net-sales-formula" class="anchor-link">The Formula for Net Sales</a>

<a href="#calculate-net-sales" class="anchor-link">How to Calculate Net Sales</a>

<a href="#sales-metrics" class="anchor-link">Supercharge Tracking Your Sales Metrics</a>

<a href="#faqs" class="anchor-link">Frequently Asked Questions</a>

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What are net sales?

Net sales are the total sales revenue of a company made over a specific period of time (month, quarter, or year) after deducting sales allowances, discounts, returns, and taxes. As opposed to gross sales, which don't include any deductions, net sales are the filtered version of a company's income. That's why they're a better indication of a company's financial situation and profitability.

Net sales are also a crucial part of any company's income statement. Some companies prefer to include both gross and net sales, while some include the latter only. In all cases, to calculate net sales, you need to have your gross sales first.

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Why do you need to track net sales?

Gross sales show the number of sales and accordingly reflect the company's performance — but they don't reveal how well the company can convert these sales to profit. That's where net sales come in.

Suppose you sell a lot of products, but your profits aren't that high. In this case, your team may be giving customers more discounts than usual or allowing more returns than they should. Or maybe your margins are too low to begin with.

Tracking your net sales will help you stop these scenarios before they start and improve your company's profitability.

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The formula for net sales

Here's the net sales formula you should use to get accurate figures:

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

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How to calculate net sales

To get an accurate net sales figure, you need to first calculate your gross sales using this equation: Gross sales = Price of product x Total number of products sold.

After you get that value, deduct the sales allowances, discounts, returns, and taxes, and you'll have yourself the net sales of your company.

If you aren't familiar with these metrics, here's a quick roundup.

Sales allowances

Sales allowances happen if you sell a product with a defect to a customer. In this case, the customer will request a partial refund in exchange for keeping the defective product. Unlike sales returns, allowances mean the buyer gets to keep the product, not the seller.

Sales discounts

Sales discounts are applied by business owners to boost their sales for a limited period of time. They're a famous marketing strategy that the entire world lives by. For instance, on the Friday after Thanksgiving, also known as Black Friday, multiple businesses around the globe offer discounted prices to get more sales.

Sales returns

Sales returns are a popular policy worldwide to help unsatisfied customers reverse their purchases. Suppose a customer finds your product unfit for them after purchasing. You can give them their money back and take the product if they return it during a specific window of time.

Sales tax

Sales tax is a specific percentage of your sales transactions that you pay to the government. Around the world, most laws dictate that you can collect the entire amount from your customers when they purchase. That said, not all US states impose sales tax, so you might not need to calculate it to get your net sales.

How to report net sales on an income statement

A business's income statement should analyze its direct costs, indirect costs, and capital costs.

Direct costs are the amount of money directly related to the manufacturing process of products, like raw materials and labor wages. To report your company's net sales on the income statement, you should include it in the direct costs portion of the statement.

What can we learn from net sales?

Calculating your company's net sales is crucial for multiple reasons. It can help you determine problems with the way you handle customers, learn where your company stands in terms of finances, and more. Below, we dig into three ways net sales help business leaders spot areas of opportunity and make better decisions.

1. Determine problems with discounts and returns

Your company's net sales can help you determine whether your discount policies are benefiting you or not. By seeing the difference between net sales revenue and your gross sales revenue, you'll know whether you applied too many discounts this year to the extent that they're eating up your budget.

The same goes for your return policies. If your team is allowing way too many product returns, you'll find that the difference between your gross sales and net sales is large. The wider the difference, the more problems you’ll have to fix.

2. Learn about the financial condition of your business

The net sales your business makes can tell you a lot about its financial health over the years. It gives you a clear idea of how well your company converts sales to profit and how effectively your sales team is managing customers.

On top of that, your net sales can show how you compare to your competitors. If your competitors have higher numbers than you, you should jump back into the competition by applying marketing strategies and enhancing your customer satisfaction.

3. Make well-informed decisions on pricing strategies

Pricing decisions can make or break a business, and luckily, calculating your net and gross sales can help you ace them. When your net sales go down compared to previous years, you'll know you should improve your products, strategize your discounts better, or apply new marketing strategies.

On the other hand, when the number is satisfying, you can focus on expanding your business while keeping your pricing strategies as they are.

Are net sales and gross profit the same?

Although many people confuse both terms together, net sales and gross profit aren't the same. Gross profits are the amount of money your company makes after deducting the costs of production and selling your products from your net sales.

To help you understand the difference better, here's an example.

Suppose you sell chairs that are $40 each, and you sold 1,000 pieces this month without any returns or discounts. In this case, your net sales will be $40,000.

If manufacturing the chairs costs you $30 per piece, the gross profit for each chair will be $10, and the total will be $10,000. This is the amount of money you truly gained for your business.

Net sales example in action

If you're still not clear on the net sales calculation, here's another example to help you understand it.

Suppose you own a store that sold a total of 50k products during the last year. If the sale price of your product is $100, then your gross sales for the year are $5 million. Now, suppose you paid $5,000 in returns, $10,000 in discounts, and $15,000 in allowances.

To get your net sales, you'll calculate your company's gross sales minus these three numbers. Here's the exact equation you'll use:

$5,000,000 - $5,000 + $10,000 + $15,000 = $4,970,000

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Supercharge tracking your sales metrics with the best CRM

If you're good at math and have all the required information readily available, you can calculate your net sales in a few minutes. The real challenge though is keeping track of the different components that go into the net sales equation, among all the other key financial metrics your company generates.

That's where the role of a robust CRM, like Streak, can really come in handy. Whatever you want to keep track of, be it your sales numbers, revenue forecasts, or even your customer churn rates, a powerful tool like Streak can help you keep tabs on all that data in one centralized place to make sure nothing slips through the cracks.

Plus, if you already know how to use Gmail and Google Sheets, you're more than equipped to use Streak. It's a no-brainer, given that Streak is built right into Gmail with features like email tracking and reminders, as well as a Google Sheets integration for robust data management.

Best of all, you can try Streak for free, and it'll only take you 30 seconds to get it up and running!

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Frequently Asked Questions

What’s another name for net sales?

Net sales are often referred to as net revenue. Both terms refer to the same amount of money, and you can use them interchangeably without an issue.

What are net sales vs. total sales revenue?

Total sales revenue is another name for gross sales, so the difference between them and net sales is that they include the total number of sales plus returns, allowances, and discounts. Meanwhile, the net sales calculation includes the deduction of these amounts.

What are net sales vs. gross sales?

Gross sales are the total amount of money a company receives after selling products without any deductions, while net sales involve the deduction of allowances, returns, discounts, and taxes.

What are net sales vs. net income?

Net sales don't involve the deduction of production expenses. Meanwhile, net income is the amount of profit a company gets after deducting all the costs associated with manufacturing and selling the products. It's calculated by subtracting the costs of production from the net sales.

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