June 27, 2021

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What Is Net Sales and How to Calculate It?

What Is Net Sales and How to Calculate It?

Sales volume is the main indicator of the company’s performance. It can be expressed in the actual number of units of products sold or in the total amount of funds received on the firm’s account after the sale of goods. In economic analysis, gross, net, target, and critical sales are calculated.

The indicator is used to analyze profits, costs, break-even points. Sales volume reflects not only the results of the company’s work, but also the situation on the market: if the demand for products decreases, a high-quality substitute appears, or legislative restrictions come into force, it will decrease. The source of information is financial reports (Income Statement), primary accounting documents, management accounting data.

What Is Net Sales and How to Calculate It?

The gross amount of sales is considered to be all, in aggregate, sales (this also includes those made on credit) for a particular accounting period. It should be noted that sales are taken into account, excluding:

  • Discounts
  • Refunds
  • Other unpredictable expenses.

Studying the gross sales performance indicator helps to identify consumer preferences and habits and compare the company with its competitors. What about net sales?

Net Sales

The meaning of net sales can be guessed from its name. It is no secret that, unfortunately, everyday business activity does not always exclude unforeseen situations and sales strategies that entail discounts. These include product returns associated with a detected defect or other unplanned costs and expenses associated, for example, with the human factor.

What Is Net Sales and How to Calculate It?

Another reason for the decrease in net sales is, dictated by competition, without which it is difficult to imagine modern market relations. It is the need to provide customers with discounts or the ability to pay later, which is sometimes necessary, not only to attract new customers but also to prevent the loss of regular ones. Therefore, net sales include only the amount received from the sale, after deducting all the costs listed above.

It is important for managers to be able to correctly calculate the volume of net sales. Conducting a competent analysis of the net sales will allow you to clearly see trends in the positive, or, conversely, negative sales dynamics. This gives each business owner the following opportunities:

  • Effectively control the work of the company and make the necessary management decisions
  • Identify profitable and unprofitable goods or services in a timely manner
  • Assess the effectiveness of the sales and marketing departments;
  • If necessary, adjust the company’s sales policy
  • Conduct more accurate market segmentation.

To be able to grow your profits, it is necessary to analyze and be able to calculate the volume of net sales.

What Is Net Sales and How to Calculate It?

Calculation

As you can see, it is not very complicated to find out the net sales volume. Just use the formula above to get the number you are looking for. For example, if the company sold 50 units of furniture for $900 each, it received gross sales of $900. However, two of the customers returned his purchase because it was defective/not suitable.

You also offered a 5% to customers who paid within 10 days of the purchase and 6 of your customers took advantage of the offer. This would mean that you have to account for $900 x 0.05 x 6 or $270 in discounts. Accordingly your net sales will equal to ($900 x 50) – ($900 x 2) – $270 or $42,930.

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Author: Charles Lutwidge

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