Gross Sales Vs Net Sales: The Differences

As a sales manager, it is normal for you to be fixated on your company’s revenue. Instead, you’re focused on helping your team connect with clients, close deals, and increase your business earnings.

Whether you’re a small-time business owner or someone planning to scale your business, you must have an accurate measure for sales forecasting.

Your revenue, as they say, can create a ripple effect on your entire business’s financial health, from budget allocation, hiring your team, and even forming relationships with clients and investors.

But how sure are you that you’re measuring your revenue correctly? What measure should you use in identifying your sales performance?

Knowing the right metrics can help your business have accurate sales forecasts to have a concrete vision of how the company is actually performing and can help formulate realistic goals and sales quotas for the sales team.

Given its importance, business owners, managers, and even sales reps struggle to have a clear view of their data and accurately forecast.

In this article, we will give you the simplest explanation of what sales forecasting is and the most basic metrics you can use to provide you with an accurate projection of the sales process and performance.

What is sales forecasting?

Sales forecasting involves setting or creating a picture that shows future market trends and performance using current or past performance data.

It is the process by which a company estimates its future revenues by predicting the amount or value that the company, a salesperson, or a sales team can sell within a given time frame – be it for a week, a month, or a quarter, or a year.

Sales forecasting is usually done by companies selling physical goods. It allows them to measure its projected performance, allowing them to strategize for its future go-to-market efforts. Also, check out the guides, B2B sales, SaaS sales and tech sales.

What makes sales forecasting important in businesses?

Just like forecasting the weather, forecasts generally talk about the future. In businesses, sales forecasting is primarily essential in identifying possible hurdles in order to lessen its effect or completely prevent it from happening.

Therefore, it is significantly essential for companies to produce an accurate sales forecast – and for good reasons.

Sales forecasts provide additional value to a company. Since a business’s sustainability in terms of cash flow and growth relies heavily on its finances, forecasts help in budgeting, planning, and strategizing all company operations. It also helps in forecasting possibilities for territorial expansions, sales strategies, production costs, supply chain management, and many more.

These are just some examples of how sales forecasts impact a company.

Benefits of a flawless sales forecast

Sales forecasts have several benefits that affect micro and macro company management. Here are some of its benefits.

1. Improved company decision-making and strategies

2. Reduced risks in the sales pipeline and market trends

3. Aligned sales quota and revenue notions

4. Measurable standards for future trends assessment

5. Focused sales teams toward profitable sales opportunities, resulting in improved success rates.

Gross sales vs net sales

There are two common metrics that are used to calculate a company’s revenue, namely, Gross sales and net sales. These offer significant advantages on their own. Therefore, it is a must to understand their key differences.

However, these two concepts are used interchangeably. If you’re a sales manager or an ordinary sales team member, understanding these terms can help you identify issues before they severely impact your business.

By understanding gross vs net sales, you won’t only have the power to track changes, but you can also pinpoint what facets you can consider as a pullback to your company. Thus, allowing you to reassess your overall performance in the business, most especially in your sales process.

What are Gross sales?

When we talk about gross sales, we refer to the total number of sales receipts added together that reflects the amount of sales income that a person or a company makes within a given period of time.

It includes all sales transactions that have generated revenue while excluding operational and production costs, expenses, and other charges. Technically, the gross sales are the value you get by adding the total number of sales without any deductions such as returns and allowances.

Calculating gross sales

To calculate the gross sales, simply add up your total sales revenue within a given period of time. You may compute your gross sales depending on your preferred timeline, which may be monthly, quarterly, or annually.

Although business owners and financial analysts track gross sales, it is not enough to use your gross revenue to gauge your company’s overall performance. It is an important tool that will allow you to calculate other sales metrics such as net sales and the company’s gross profit margin.

Let’s see how gross sales can be used in a real-life setting

Suppose you are a clothes store owner. In the month of July, you were able to sell 500 pairs of jeans which generated a value of $40,000. This amount is the total number of sales generated within a given period of time – making it your gross sales value for the month of July.

In this example, costs of deliveries, supplier charges, taxes, and other expenses were not taken into consideration.

While the value of gross sales shows the business’s revenue, it does not fully present the store’s profits. So even if a company has a high gross sales figure, it does not mean that the company is making a great profit.

Of course, you would want to get a fuller picture. This is where the next metric comes in – the net sales.

What are net sales?

Net sales refer to the chunk of the revenue that remains once deductions are made. In getting the net sales figures, you have to consider that these types of deductions have a natural debit balance calculated to neutralize the sales account.

Sales Returns

Sales returns pertain to the refund resulting from customer returns due to product issues. These issues can stem from different factors such as delivery mishaps, damaged goods, or other significant reasons that make the customer return the products and demand a refund which is typically bound by return merchandise authorization.

The amount of refund needs to be removed from the total amount of the gross sales generated.

Sales Discounts

Sales discounts are the reduced prices offered to potential clients to motivate them in buying your products. Early payment discounts are given when the buyer pays at a specified period as stipulated in the purchase conditions.

Sales Allowances

Sales allowances are price reductions done due to slight product defects. Basically, the seller provides the customer an allowance after the price paid for the faulty product. In this sense, they come into an agreement where the seller keeps the product with a partial refund against the paid purchase.

Calculating net sales

To calculate your net sales figure or net income, you have to know all the sales deductions that you need to make along with your total calculated gross sales.

In its simplest form, the net sales figure is the value of your company’s gross sales minus the total value of all your deductions. Simply deduct the total value of your sales returns, sales discounts, and sales allowance from your gross sales to get your net income.

Below is the actual net sales formula.

Some other expenses which may be counted as your operational expenses can include marketing costs, payroll expenses, rent, utilities, and production expenses.

Therefore, the topline sales number or your gross sales is not your total income which you take home at the end of the day. In order to accurately evaluate your company’s performance, you have to calculate net sales.

Basically, your net sales can be an accurate measure that can serve as the baseline for your improvement in business operations that can help you not only grow your business’s sales but also to incur growth.

Presenting your gross and net sales data

A company’s net sales and gross sales information through the use of an income statement.

Financial statements are inherent in every company.

A company’s income statement is a type of financial statement that presents your company’s income and expenses.

How the numbers and data are presented is up to the company. If comparing gross sales vs net sales is the goal, all the values of the company’s gross revenue, net sales, and deductions can be presented separately in one income statement.

However, most companies’ gross income is not usually included in their financial statements as they can be misleading. The difference between gross sales is that they treat it as an internal value as part of understanding their sales transactions and trends.

With an accurately filled income statement, you can easily visualize whether your business is gaining profit or incurring losses within a specified period.

Gross and net sales: Why it matters

Understanding gross and net sales terms are crucial to every business, regardless of size.

Of course, you only want to see your business flourish; without an accurate value for your gross sales and net sales, it would simply be impossible. So, you don’t have to see it as gross sales vs net sales.

It should be gross sales and net sales – because these concepts, one way or another, matter.

Perform competitive analysis

Suppose you can calculate gross sales and net sales accurately. In that case, you will not only be able to keep track of your financial health, but you will also have an accurate baseline for your company’s performance against your competitors.

Let’s say your net sales are consistently hitting your quota; it means that your strategies are working right for your business’s sales. On the other hand, if your net sales are significantly low, you may start looking into areas to improve, such as your current marketing and sales strategy.

Create better decisions and strategies

As your gross sales vs net sales are considered, your sales process can take a right turn in the industry. As a result, you have an edge in making more strategic decisions regarding budget allocation and stock control.

If you base your decisions solely on your company’s gross sales, you may have problems overstocking your products, which can later compromise other crucial expenses within your operations. This can result in decreased efficiency and incur losses in no time.

Avoid presenting incorrect data

It can be alluring to use the gross sales revenue as the sole basis of your performance as it may show high figures most of the time.

However, as impressive as they may be, the gross sales figure alone can be very misleading. This can be detrimental to accurate forecasting and planning. Thus, gross and net values should always go hand in hand.

Motivate your sales team

If you can track your gross and net sales, you already have one key performance indicator (KPI) covered. It provides you with an accurate measure of how your sales team actually performs.

You may also use these values whether your sales reps’ gross sales are closer to the net sales, making it easier to analyze whether they are consistently bringing value to the company’s overall growth and performance.

What do gross sales and net sales say about your business?

Understanding your company’s growth and performance is not about what the better measure is between gross sales vs net sales.

While gross sales aren’t exceptionally reliable, they come hand in hand with calculating net sales.

The key difference between gross sales and net sales will always remain valuable as an indicator of your product’s quality. Thus, if the disparity between these values remains significantly high or growing, then you may want to check any issues with your products or current sales strategy. Get detailed knowledge in the sales analysis reports.