Introduction to Net Sales
Net sales refer to the sum of the gross sales of a business minus their returns, allowances, and discounts. Net calculations of the sales are not always externally transparent. They can often be factored when reporting on the statement of income with the top-line revenues.
Net Sales Explained
The statement of income is the financial report used primarily in the analysis of the revenues, revenue growth, and operating expenses of a company. The revenue statement is broken down into three sections that help direct cost analysis, indirect costs, and capital costs. The portion of the revenue statement with direct costs is where net sales can be found.
Companies may not provide much outside transparency in net sales. Because of the distinct components of its measurement, net sales can also not apply to every business and industry.
Costs associated with net sales will affect the gross profit and gross profit margin of a company. Still, net sales do not include the cost of sold goods which is usually a primary driver of gross profit margins.
If a company has some refunds, bonuses or discounts, then changes are made to define net sales and disclose them. Companies may declare gross sales, and then net sales, and followed by the cost of sales in the statement of income's direct cost portion. Alternatively, they may report net sales in the top line and then move on to the selling goods costs.
Net sales do not account for the cost of the goods sold, general expenses, and administrative expenses that are analysed with various effects on the margins of the statement of income.
Analysis of Net Sales
Net sales do not account for items, such as cost of goods sold, general expenses, and administrative expenses. If a company gives full disclosure of its gross sales versus net sales, then external analysis can be of interest.
If the difference between gross and net sales of a company is higher than an industry average, the company may be offering more discounts. They may be alternatively making excessive returns compared to industry competitors.
Companies typically strive to maintain or beat the averages in the industry. Returns can often be resold quickly, without creating problems. Allowances generally are the result of transportation problems that may prompt a firm to review its shipping tactics or methods of storage. Companies offering discounts can choose to lower their discount terms or increase them to become more competitive within their industries.
Cost Factors affecting Net Sales
Gross sales are a company's total, unadjusted sales. They are reserved for companies that use accrual accounting when a transaction takes place. They are booked in case of companies using cash accounting when cash is received.
Certain companies may not have any costs that will require a calculation of net sales, but many companies do. Cost factors affecting net sales are given below:
- Sales Returns
- Allowances
- Discounts
Accordingly, a formula is arrived at as follows: Net Sales = Gross Revenue/Sales (less) Sales Returns (less) Allowances (less) Discounts
