For example, if your net sales ended up being lower than you budgeted for, you may need to consider lowering your prices to attract more customers. Net sales is equal to gross sales minus sales returns, allowances and discounts. As we mentioned above, Net Sales is what remains after all returns, allowances, and sales discounts have been subtracted from gross sales.

However, you may not receive full payment from the invoices you send to customers. Your total sales (gross sales) may be reduced by sales returns, allowances and discounts. Net sales refers to the total amount of sales made by a business after all deductions https://www.bookstime.com/articles/net-sales have been considered. It is the total sales made within a specified time frame minus any sales returns, discounts, and sales allowances. Typically, this accounts for the actual sales made from customers purchasing its products and services.

Deductions

One example of discount terms would be 1/10 net 30 where a customer gets a 1% discount if they pay within 10 days of a 30-day invoice. Sellers don’t account for a discount unless a customer pays early so notations must be retroactive. Pull out revenue metrics from your sales CRM by source, salesperson, territory, and more, with revenue analytics.

Being less generous with your discounts, upselling, and finding other methods of building value for the customer before you offer a discount or allowance. These can still incentivize sales without the need to discount the cost of your goods. Seasonal demand fluctuations and overstocking can also be a good reason to drive sales with reduced prices. You might also offer discounts when promoting new products to encourage customers to try them. Because net sales includes revenue forfeited from discounts, it’s a great way to understand the impact discounts are having.

Example 2: Net Sales for a particular product line

An income statement is a financial statement that reveals how much income your business is making and where it is going. The net sales figure on an income statement shows how much revenue remains from gross sales when sales discounts, returns and allowances are subtracted. If a business has any returns, allowances, or discounts then adjustments are made to identify and report net sales. Net sales do not account for cost of goods sold, general expenses, and administrative expenses which are analyzed with different effects on income statement margins. When it comes to measuring business performance, it’s important to understand the difference between gross revenue vs. sales and revenue vs. gross sales. Gross revenue represents the total income generated by a business, while sales refer to the revenue generated from selling products or services.

• This means that net credit sales do not include any sales made on cash.
• Other companies skip the part of identifying the gross sales and deductions and simply list the net income or net revenue.
• Different businesses work on different discount terms with their customers.
• This may raise potential concerns about your short-term profitability.

Furthermore, net credit sales also take into account sales return and sales allowances. The best reporting method of all is to report gross sales, followed by all types of discounts from sales, followed by a net sales figure. If there are large discounts from sales, the reason for them should be disclosed in the accompanying notes to the financial statements. This level of detailed reporting may be employed for internally-generated financial statements, so that managers can take action to address any excessive discounts from gross sales. Once you deduct sales returns, discounts, and allowances from gross sales, the remaining figure is your net sales. Typically, a firm records gross sales followed by allowances and discounts.

Tracking Net Sales and Cost of Sales

Most notably, expenses are not taken out in the Net Sales calculation. Net sales can be considered the actual ‘top line’ as it provides a business with a clearer understanding of revenue. Learn more about what a CRM database can do, how to set one up and pitfalls to avoid. Here, we’ve outlined some of the common causes that can increase the distance between gross and net sales, as well as some advice for how to get your sales back on track. By combining the two, you get a more accurate representation of your current sales performance. As a result, you can create informed and strategic sales forecasts.