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Calculating net sales is kind of a love-hate type of task, isn’t it? On the one hand: yay, sales! But on the other hand: ugh, financial calculations that I need to do because the IRS told me to. It’s one of those tasks that isn’t particularly fun, but is incredibly important for your business.
Don’t worry, though. Net sales calculations are easier that you might think. All it takes is some data harvesting and a bit of Grade 5 math. This article will walk you through how to calculate net sales, explain why you need to do it, and share some examples of how to use these figures to make your business better.
What are net sales (aka net revenue)?
Net sales—also called net revenue—is the total amount of money that a company earns from the sales of its products or services, minus deductions from returns, allowances, and discounts.
Let’s say you run a retail store. The total amount of money you make from selling your products in-store or online—minus the amount you give back from returns, allowances, or discounts—is your net sales volume.
This accounting metric is critical for any business that generates revenue from the sale of a product or service. It’s calculated on a weekly, monthly, or annual basis, and is used to provide a picture of your company’s real sales performance by excluding any sales that did not result in net positive profit.
Because of this, tracking and understanding net sales—both company-wide and by product or service line—is critical to accurate financial reporting, performance auditing, strategic decision-making, and ensuring adequate cash flow.
Net sales is one of a slew of accounting metrics that companies must track to understand performance, and to comply with tax filings and other financial regulations. Here are some others that relate to net sales, but differ slightly.
Net sales vs. gross sales
Gross sales represent the total sales revenue that a company earns from selling its products or services. This is a whole figure, kind of like gross pay, that doesn’t include any deductions.
Net sales, on the other hand, subtracts deductions—hence the distinction between net and gross.
Net sales vs. net income
Your net income—aka your bottom line—is the profit that a company makes after all expenses have been deducted from their total revenue. This includes deductions from sales, along with company operating expenses, taxes, interest payments, and more.
Net sales is calculated before these additional deductions, and only takes into account returns, allowances, and discounts on sales revenue.
Net sales vs. gross profit
Gross profit is the difference between net sales and the cost of goods sold (COGS). This metric includes direct costs associated with producing your products or services, and is used to measure the efficiency of production and pricing.
Net sales is a starting metric to help you calculate gross profit. For example, if net sales equal $90K, and COGS equal 40K, then your gross profit would be $50K.
Net sales vs revenue
Revenue is the total income you generate as a company, across all business activities. This includes sales, interest, and other income sources.
Net sales refers to income—or revenue—specifically generated from sales (minus deductions). It’s similar to revenue, but is focused purely on income generated from sales activities.
Why is calculating net sales important?
Net sales gives you how much revenue you’re bringing in from sales of your products or services. Sales, of course, is one of the biggest revenue drivers that your company will have, so understanding exactly how much you’re generating is virtually non-negotiable.
Here are five reasons to calculate net sales for your business.
1. Ensures accurate financial reporting.
Net sales provides a picture of how much revenue you’ve generated from your sales activities. Having this figure is a requirement for filing accurate financial statements for tax and accounting purposes, and when reporting the state of your business to stakeholders, investors, and lenders.
2. Enables measurement of company performance.
Calculating net sales helps you understand the efficacy of your sales, marketing, and customer satisfaction strategies.
For example by analyzing net sales—and specifically deductions—you can pinpoint potential problem areas like high return rates or excessive discounts. Likewise, you can calculate net sales by product line or sales and marketing channel to identify what strategies are driving the most revenue, and which are lagging.
These insights can then be used to inform future sales and marketing campaigns, new product development, and other strategic growth areas.
3. Allows for accurate budgeting and forecast.
You can’t budget and forecast revenue properly without understanding net sales. Regularly calculating and tracking this figure ensures that you always have a solid idea of how much money you’re bringing in from sales, and how much you can spend on growth strategies. This is a basic but fundamental concept in small business money management.
4. Helps to inform profitability analysis.
Net sales is also a key metric that you need to calculate even more important financial figures like gross profit and net income. Collectively these figures illustrate your overall profitability, and allow you to closely control costs and optimize pricing strategy.
5. Drives more accurate tax reporting and compliance.
Lastly, accurate net sales figures are a requirement for tax calculation and compliance with various regulations.
For example, reporting your business’ performance to the IRS each year requires an annual net sales volume. And, Generally Accepted Account Principles (GAAP), an accounting standard that dictates regulation for publicly traded companies, require that companies prepare financial statements that include a breakdown of gross sales, net sales, and various other financial metrics.
How to calculate net sales.
The net sales formula is:
Net Sales = Gross Sales – (Returns + Allowances + Discounts)
Here’s a breakdown of each of the variables in that formula to help make your calculations easier.
Gross sales is the total revenue that your business generated from all sales, before any deductions.
For example, if your business sold 1,000 units of a product for $100 each, the gross sales on those transactions would be $100,000. This includes all transaction types across all channels, including brick and mortar and online, and via cash, credit card, debit card, gift card, or bank transfers.
Returns are the value of all goods returned, or all refunds given for services. This includes both full and partial refunds from a variety of potential causes, including faulty products, customers changing their minds, complaints about customer service, and any other reason you accept.
For example, if a customer returns goods worth $5,000 during a given reporting period, that amount will be deducted from your gross sales amount.
Allowances are price reductions given to a customer due to product defense or damages, or any other issue with an item or service provided. These aren’t full refunds, but rather partial credits that mark down the difference between the listed price and the adjusted price that the customer pays.
For example, if a company sells $3,000 worth of defective goods, and offers a 50% credit to customers, the net sales amount would be $1,500—$3000 in gross sales minus $1,500 in allowances.
Discounts—aka markdowns—are reductions in the selling price for a product or service. These include sales, promotions, coupons, and any other incentive for the customer to make a purchase.
In a net sales calculation, the discount variable refers to the total amount of money taken off of sales within a specific period of time. For example, if your company offers a 25% discount on a product worth $100, the net sale amount for one unit would be $75.
When to calculate net revenue and sales.
Every company will calculate net revenue and sales at different intervals, depending on their financial obligations and strategic planning cadence.
Here are some common timelines for calculating net sales:
- Monthly. Monthly net sales calculations can help you keep a close eye on sales performance. This allows you to quickly identify issues, like a spike in returns, or opportunities, like a particularly popular product segment.
- Quarterly. Quarterly net sales calculations are often required as part of providing financial reports and statements to stakeholders, investors, and regulatory bodies. For example, a business may need to provide a statement of earnings each quarter to their investors as part of their agreement with those partners.
- Annually. Annual net sale calculations are also required for general financial reporting. In addition, you’ll likely need to calculate net sales annually as part of your tax filings to the IRS.
- On-demand. Lastly, you may need to calculate net sales on-demand and as required. This might be to respond to audit requests, applying for loans, or when analyzing sales performance and financial health.
Regardless of when net sales are calculated, it’s always a good idea to keep close tabs on this financial metric. Consider it to be a KPI for your business that helps you understand how you’re performing and where you can improve operationally.
Net revenue calculation examples.
Before we close out, let’s look at three examples of net sales or revenue calculations. This is designed to show you the various considerations that need to be made when calculating net sales, depending on the scope and complexity of your business.
Example 1: Brick and mortar clothing retailer
EpicChic is a brick and mortar clothing retailer that owns a single location. They sell exclusively through their store, with no online sales.
The store runs regular promotions for specific brands and product lines. They’ve just finished running a labor day promotion, and need to calculate net sales. This will help them understand how successful their promo campaigns were.
Total gross sales for the sales period were $32,000, with $26,000 coming from items with promotional discounts. The promotion for this campaign knocked off 25% for buyers.
In addition to discounts, EpicChic customers also returned $1,200 in products, with $300 being written off as allowances due to a few faulty products.
Isolating for just the promo campaign, EpicChic’s net sales calculation would look like this:
$26,000 – ($6,500 + $1,200 + $300) = $18,000
Total net sales for this campaign, therefore, came out to $18,000. EpicChic can now take that number and compare it to similar campaigns to see how this round of promotions performed.
Example 2: Hybrid brick and mortar and online pet food store
Fetch Flavors is a pet food store that sells through both a brick and mortar location, and through an online store. They’re performing a quarterly audit of their sales channels to understand where they generate more revenue: online or brick and mortar.
While pricing across the two sales channels are the same, promo and discounting differs. The ecommerce teams push higher volumes of products, but also tend to discount them more. There’s also a bigger problem with returns from online sales.
To manage their calculation, Fetch Flavors isolates the sales volumes in their POS and online store to Q1 of that year. They pull gross sales volumes by channel, along with returns, allowances, and discounts.
The figures come out as followings for Q1:
Gross Sales:
- Brick and Mortar: $43,500
- Online: $56,250
Returns:
- Brick and Mortar: $1,250
- Online: $8,525
Allowances:
- Brick and Mortar: $800
- Online: $1,300
Discounts:
- Brick and Mortar: $6,500
- Online: $9,800
Total net sales for brick and mortar breaks down like this:
$43,500 – ($1,250 + $800 + $6,500) = $34,950
For online sales, that breakdown looks like this:
$56,250 – ($8,525 + $1,300 + $9,800) = $36,625
What’s telling with this analysis is that, while gross sales from the ecommerce store is significantly higher than brick and mortar, net sales is almost the same. This indicates that there are far more deductions being applied to online sales. Returns, in particular, might be an area of concern and focus for Fetch Flavors going into Q2.
Start calculating net sales
Now that you understand how to calculate net sales, and when to do it, finding all of the right sales data is your next move. We recommend digging into your point of sale system, ecommerce platform, and personal books to pull any and all sales data you have on hand.
Many of these platforms integrate with Homebase—such as Shopify, Square, Lightspeed, and PayAnywhere. That makes it easy for you to calculate the necessary info you need for taxes while also seamlessly managing your payroll and hourly teams. Plus, Homebase’s easy data collection even allows you to sync employee data with sales data to enable more efficient labor reporting. The result? A more efficient, more streamlined financial process that gives you more time to manage the rest of your business. Try Homebase for free today.
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