Gross and net sales are two important sales metrics that reflect the revenue earned by the company over a specific period. However, each metric serves a different purpose, and knowing the difference between the two allows companies to accurately track and report sales performance.
Tracking both net sales and gross sales is equally crucial, as it allows stakeholders to gain insight into the financial health of the company. Real-time sales tracking and financial analysis using ERP software allows businesses to improve decisions and adjust their sales strategies.
What is Gross Sales vs Net Sales?
Gross sales is the revenue generated by a company from selling its goods and services before accounting for deductions, while net sales is the amount of revenue generated after deducting discounts, allowances, and returns from gross sales.
Both net and gross sales appear at the top of the company’s income statement as separate line items. Strong gross sales can lead to a high EBITDA by controlling costs, reducing returns and improving sales tracking.
Net sales and gross sales should never be used interchangeably, especially in the manufacturing industry, where inventory sold can be returned by the customer due to damage or defects, which is accounted for as sales returns. That’s why net sales are always lower than gross sales.
Only using gross sales to track business performance can be misleading. Net sales figures, along with other essential metrics, play an important role in measuring business success.
What Are Gross Sales?
Gross sales is the total revenue a company generates from the sale of goods before deducting discounts, allowances, and sales returns from the total revenue. In other words, gross sales reflects what the company has sold at listed prices. And when we account for deductions, we get net sales.
Management often uses gross sales to measure its top-line and year-on-year revenue growth. It is a useful metric to compare the performance of sales teams and for setting sales targets. Besides, gross sales helps evaluate the performance of different products based on the revenue they generate.
Gross Sales Formula
Two things are required to determine gross sales: product price and the number of units sold. Use the formula below to easily calculate gross sales.
Gross Sales = Total Units Sold × Price per Unit
For example, if XYZ Tyres company sells 2000 tyres in a month at a selling price of Rs. 3000 per unit, its gross sales for the month would be Rs. 60,00,000 (Rs. 60 lac). Gross sales helps companies to predict future cash flow, which allows them to streamline inventory planning.
— You can also read :What is Sales Forecasting? | Definition, Methods, And Importance —
What Are Net Sales?
Net sales are the company’s gross sales minus three types of deductions, including sales returns, discounts, and sales allowances. These deductions are also called contra-revenue accounts. Finance teams rely heavily on net sales for accurate financial reporting.
Let’s take a look at what each deduction means.
Sales returns are the inventory items returned by the customer after purchase, usually due to product damage or defects. If a customer decides to keep the goods purchased despite not being fully satisfied with them, or if the order delivery was delayed, companies can offer a rebate or incentives to such customers. These are called sales allowances. On the other hand, discounts given to customers in the form of early payment discounts and bulk purchase discounts are classified under sales discounts.
Net Sales Formula
To calculate net sales, you require four inputs. They are gross sales, sales discounts, sales returns, and sales allowances. With a sales management system, companies can automatically track all of these input values and accurately calculate net sales. The formula for net sales is as follows:
Net Sales = Gross Sales – Sales Returns – Sales Discounts – Sales Allowances
Let’s understand net sales with the help of the same XYZ Tyres company example.
If XYZ Tyres had a monthly gross sale of Rs. 60 lac, but the tyres worth Rs. 2 lac were returned by the customers due to damage during transportation. XYZ Tyres urgently needed working capital, so they decided to give a 2% discount on a tyre consignment worth Rs. 40 lac, which comes to Rs. 80,000. Further, a key customer decided to keep the entire stock of tyres even though a few tyres had a minor defect. XYZ offers this customer an allowance of Rs. 1 lac to maintain the relationship.
Using the formula, the net sales for XYZ Tyres = 60,00,000 – 2,00,000 – 80,000 – 1,00,000
Net Sales = Rs. 56,20,000
| Gross Sales | Net Sales | |
|---|---|---|
| Meaning | Total sales before deductions | Total sales after deductions |
| Use | Tracks overall sales volume | Tracks actual revenue |
| Reporting | Internal reports | Financial statements |
| Impact on Profit | No, doesn’t show real earnings | Directly affects gross & net profit |
| Value | Higher than net sales | Lower than gross sales |
| Calculation | Does not rely on net sales | Calculated using gross sales |
| Formula | Total Units Sold × Price per Unit | Gross sales – Deductions |
Understanding the Benefits of Gross and Net Sales
1. Eliminate Reporting Errors
Gross sales provide an overview of the total sales performance, suitable for internal reporting. In contrast, the net sales number indicates actual earnings after deductions. Knowing the difference between the two avoids misreporting in the company’s income statement.
2. Improve Decision-Making Accuracy
If the difference between gross sales and net sales figures is high, it may be a wake-up call to evaluate sales strategies and improve decisions. Is the company offering too much discount? Are returns or allowances more than usual?
3. Motivate and Manage Sales Team
Sales managers often compare team performance based on gross sales revenue achieved. But if the net sales of one team are much lower than another team, managers can proactively use sales management techniques to achieve the company’s sales goals.
4. Run Competitive Analysis
Two competitors with similar products and similar gross sales can have different net sales. There could be many reasons for that. Perhaps, product quality issues are leading to higher sales returns. Or, the company with higher net sales uses an ERP system for a smooth post-sales order fulfillment process.
5. Discover revenue leaks
Revenue leaks occur when a company fails to track all its sales transactions due to manual data entry processes. As transaction volume increases, billing and invoice errors further increase, leading to profit erosion. To solve this, companies use accounts receivable automation for quick and accurate invoice processing.
Track Your Sales Effortlessly with Sage X3
Gross sales and net sales are both essential for a business to track its revenue. While gross sales measures total sales, net sales gives a true sales figure after subtracting deductions from gross sales. Therefore, both metrics are vital for decision-making.
Sage X3 is a new-age automated ERP solution with built-in sales management and extensive financial reporting features. With all your business data accessible on one simple interface, teams can easily analyze key sales metrics and generate instant reports without the hassle of manual work.
Gross Sales vs Net Sales FAQs
1. What Is The Difference Between Gross Sales And Gross Profit?
Gross sales is the total amount of revenue before adjusting for deductions, and gross profit is the total amount of revenue minus the cost of goods sold.
2. Are Net Sales The Same As Revenue?
No, net sales and revenue are not the same. Net sales is what a company earns from selling its goods minus deductions such as sales discounts, allowances and returns. Revenue refers to the total revenue earned from all sources of income, including income from goods sold, commissions, interest fees, etc.
3. How Do Returns Affect Gross And Net Sales?
Sales returns is a type of deduction, which is subtracted from gross sales to generate net sales.
4. Is Gross Sales Reported Before Or After Tax?
Gross sales are always reported before tax because tax collected on sales is not part of the company’s revenue. Taxes are liabilities to be paid to the government.
