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Net sales are crucial for small and large-size businesses because your income statement will be incomplete without it. Net sales can help you in making financial decisions for your business and identifying a profit or loss by revealing revenue output. So, it is an efficient way of measuring the financial condition of your business and making changes accordingly.
As a business owner, you need to calculate net sales with exact figures at some point. For that, there is no better way than using the net sales formula. In fact, it is much easier than solving complex mathematical problems.
Right then, let us straightaway learn about what is net sales before we jump into the net sales formula and how to calculate net sales revenue.
What is Net Sales?
Net sales refers to the overall revenue generated by your business after you take off customer returns, discounts, and tax deductions. Basically, it is a part of financial reporting that is mostly used by product-based companies to gauge revenue generation on a monthly or yearly basis. Many business owners also calculate net sales to display an income statement. So, in simpler words, it is leftover money after deducting allowances and discounts, which symbolizes the revenue output of your business.
What is the Formula for Net Sales?
For calculation, you will need gross sales, return allowances, or any offered discounts (in numbers). Gross sales are your company’s revenue without making any deduction. Whereas a return is a refund you processed for exchanging goods. Allowances are cost reductions for defective items and discounts are rewards earned by customers. While calculating, if net sales come out higher than the average, then you are running a profitable business with increased ROI.
Here is the net sales formula:
Net Sales = Gross Sales – [Customer Returns + Allowances + Offered Discounts]
In case you are not familiar with gross sales, you can take the total number of units sold and divide it by sales price to identify the gross sales before calculating net sales. Or simply use this formula:
Net Sales = [Total number of units sold / sales price] – [Customer Returns + Allowances + Offered Discounts]
To clear your doubts, let’s take an example to understand how to calculate net sales
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Example of the Net Sales Formula
For instance, let’s say you own a multi-cuisine restaurant in LA, United States. One day you want to know the top-selling food items and check whether there is any issue with the selling process. Your answers to these questions lie in the net sales, which you need to calculate.
Assuming your company’s gross sales are $200,000 (5000 total items sold * $40 sales price) and allowances are somewhat around $20,000. Also, you offered total discounts of 10,000 and incurred customer returns of $70,000.
So, put these numbers collectively into the net sales formula.
Gross Sales – [Customer Returns + Allowances + Offered Discounts] = Net Sales
$200000 – [$70,000 – $20,000 – $10,000] = $160000
Based on the above calculations, $160,000 is your company’s net sales. Now you will have an idea about how to find net sales for streamlining the selling process and whether to upgrade pricing plans for your restaurant or not. Also, you can use this figure to highlight on your income statement.
4 Factors That Impact Net Sales
Here is a list of some factors that may impact your company’s net sales.
1. Product discounts
When you have a limited period offer running to boost conversions, you may see increased demand in product sales. However, these discounts can have a significant impact on your overall net sales.
2. Refund
Unhappy customers may request for partial or full refund if they are not satisfied with the purchased product. Such a refund process made through debit or credit card can impact your net sales figure.
3. Allowances
Allowances are given to customers if they have any issues with products but do not wish to return them. In this scenario, your company can provide allowances to keep damaged products with them, impacting the overall company’s sales.
4. Taxes
The taxation process is followed by businesses of all sizes where you pay some amount to the government. This amount can be collected from the customers in the form of sales taxes, which will be counted in gross sales but subtracted from the net sales amount.
Why is Net Sales Important?
Calculating net sales is important for every business owner to spot the areas of improvement to achieve their financial goals. Let’s dig deeper on this topic.
Business’s financial status
Net sales are the key to assessing your business’s financial health as it unlocks the revenue generated by your company. You can have a clear view of net income that can help you make price adjustments and boost sales.
With net sales in hand, businesses can decide whether to lower the production cost in order to earn high profits.
Inspect sales discounts
Since gross sales only reveal the total company’s sales figure, net sales play a crucial role in helping you learn about net profit. Using net sales, you can not only track profit but also know why it is too low or high. If profits remain low despite increased product sales, it signals a need to reevaluate discount strategies and investigate any issues in the return process. Analyzing net sales helps determine if discounts are negatively impacting sales figures, thereby mitigating potential losses and uplifting overall profitability.
Pricing decisions
Apart from this, net sales come in handy whenever you want to make pricing decisions. It is something that provides detailed insights on revenue generated from the number of sold products. Consequently, you will have an idea of whether to make changes to the pricing plan or go with the same strategy.
Gross Sales vs Net Sales
Both gross sales and net sales reveal the details about your company’s revenue. But, net sales include only the company’s profit and not other elements like returns or deductions. Let’s find out what really sets them apart.
| Difference | Gross Sales | Net Sales |
|---|---|---|
| Dependency | It doesn’t rely on net sales | It is calculated from gross sales |
| Relevancy | Gross sales may not be relevant | Net sales will be relevant and accurate as well |
| Amount | You get a higher amount post-calculation | The amount will be reduced after taking off deductions |
| Formula | Gross Sales = no. of sold units * price of the product | Net sales = gross sales – [return + discounts + deductions] |
| Usage | Provides data to gauge sales metrics | Helps you identify issues with the selling process |
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Conclusion
On a conclusive note, net sales have been the key factor as far as your business finances are concerned. It gives you the exact net sales from which your company is earning a profit or suffering from losses. Based on that, you can develop an enhanced pricing strategy to achieve business success. Plus, make changes to discounts offered on products to improve net profit. Also, it will be helpful in generating the company’s income statement.
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