How to Calculate Net Sales

Net sales are the total amount of revenue your business has after accounting for any sales returns, allowances and discounts. It should be recorded in your profit and loss statement. Knowing your net sales figure is essential as it gives a more accurate picture of your company's revenue than gross sales and tells you how much you're making on the goods and services you offer. But how do you calculate net sales, and what can you learn from this vital information?

What is the net sales formula? 

The net sales formula is used to determine business revenue after deductions. To get an accurate figure, therefore, there are several elements you need to know. Firstly, gross sales is the amount of sales revenue you earn before deductions. If you offer any discounts, such as a percentage off for quick payment or regular customers, you'll also need to have this figure. In addition, you'll need details of any goods that have been returned for a refund or any price reductions that have been implemented due to goods being damaged, defective or otherwise requiring a discount. Once you have this information, you can calculate your net sales using the formula:

Net sales = gross sales - returns - allowances - discounts

So, if gross sales are £50,000, you've had returns of £500, allowances of £1,000 and discounts of £1,500, your net sales total is £47,000.

Why use the net sales formula?

As with most financial metrics, net sales data is designed to give you more accurate information about your business's performance. In this case, it will provide an accurate picture of your revenue. If you relied on gross profit alone and didn't take into accounts returns, allowances and discounts, your numbers could be seriously inaccurate, giving an over-inflated impression of your profit levels. Tracking your net sales will also highlight if you have particularly high deductions that can be reduced or if there are other ways that revenue could be improved, such as reducing returns. High returns could indicate an issue with your manufacturing process. In contrast, if people only buy your products or services when they're discounted, it could mean your sales strategy needs a rethink. If your net sales are lower than you budgeted for, you may need to consider lowering your prices more permanently to attract more customers.

What is the difference between net sales and gross sales? 

Gross sales represent the total revenue a business generates during a specific period. While an essential metric in itself, highlighting how good a business is at attracting and generating sales, it doesn't account for any returns or allowances on the products or services sold. This is where net sales come in. 

Both numbers are important in understanding the overall financial health of a business, and together they can deliver even greater insight. For example, if your gross sales are increasing but your net sales are not, it may mean you're doing well when it comes to sales, but you might be giving discounts that are too large, or your quality control isn't up to scratch, and you're getting too many returns. Keeping a regular eye on your net sales numbers and ensuring those numbers are accurate will ensure you're clear on the financial health of your business and the costs incurred when making sales, as well as help with decision-making.