Definition
Gross Sales is the total of all the sales of the company’s products and services in a fix time duration without deducting or subtracting the returns and discounts.
Here you need to remember that Gross Sales does not include the costs of goods sold, rebates, operating expenses, discounts, tax expenses or any other additional charges. So, operational expenses are deducted from the gross sales
So, in the simplest form, you can understand Gross Sales as the sum of all the sales-
Gross Sales= Net Sales + Discount + Sales Returns + Sales Allowances
In this article, we will be diving deep into the world of Gross Sales to unfold some of its key concepts that play a significant role in the effective and profit-oriented business management. So, without taking any further, let us get started right away-
Introduction to Gross Sales
When it comes to the success of the company, sales are essential for it.
There should not be any befuddlement about the fact that when the sales increase, the profits increase as well. So, to ensure the success of the business, having an idea about sales is essential.
That is one of the main reasons why companies tend to have a team that can estimate the sales of the company in the best way without any trouble or hassle for sure. Here we are going to talk about one type of transaction that companies need to know about to have some results, i.e. Gross Sales.
You might be wondering what that is.
Well, that is precisely the figure that talks about the revenue of a company before deducting returns and discounts.
Let us have a look upon the importance of Gross Sales-
Why calculating Gross Sales is Important?
Well, gross sales can be defined as the total amount of sales that a company tends to make within a specified period.
It is the sum of all the sales that are being made by the company for sure.
How much of the product has been moved on from the shelves of the company to the customers is denoted by the gross sales.
So, it is quite useful for the stores that sell retail items, as it will talk about the total amount of revenues that a business generates.
Now there is one thing that people need to know about gross sales.
This is a figure which doesn’t make the adjustments of specific sales numbers into consideration. So, it can be considered as a figure which is total in the best way. The applicability of the gross sales will be a reminder of the overall success that the company has been able to achieve in all this time.
So, the retail businesses need to make sure that they have an idea about gross sales in the first place. This is going to help them out in the process. Let us gather some more details about the concept.
From gross sales, businesses can reach the net sales by deducting three things- Discounts, Allowances, and Returns.
From the net sales, one can then find Gross Profit, and for this, you will be supposed to subtract the cost of goods you sold in the given period from the net sales.
So, all in all, the importance of Gross Sales is taught in its applicability in finding out essential figures that can tell you about the growth lines and profits of a company.
Let us now have a more proper look upon the difference between the Gross Sales and Net Sales-
Understanding the Difference between Gross Sales and Net Sales
Now that you have a decent idea about gross sales, it is time to understand the difference between that and net sales of a company.
The first thing that you need to know about net sales is that it is calculated with the deduction of credits, discounts, rebates, and returns from the gross sales of the company.
Most people need to know about this distinction, for sure.
This is because it doesn’t matter what the total figure of sales is in case there is a pretty significant rate of return. This is something that can make or break a company.
Hence, understanding the difference between net sales and gross sales is essential. The profit that you get from gross sales is not something that the company is fully provided with. It is the net sales that get transferred to the company as profit.
Let us have looked upon the different grounds upon which Gross Sales and Net Sales can be differentiated-
1) Definition
Gross Sales is understood as total sales without any types of deductions, while Net Sales is the calculation of total sales after the deductions from the gross sales.
2) Dependency
Gross Sales is not dependent upon Net Sales, but Net Sales is entirely reliant on the Gross Sales.
3) Amount
Net Sales are derived from Gross Sales, and that is why the amount of gross sales is always going to be higher than the number of Net Sales.
4) Calculation
For calculating gross sales, you need to multiply the units sold with the selling price for each of the units, while for calculating Net Sales, you are supposed to take Gross Sales and subtract the total of deductions like returns, discounts, and allowance.
5) Decision Making
Net Sales is the most effective player in the decision making in comparison to Gross Sales. With Net Sales, you can find out the more accurate financial position of a company.
Example of Gross Sales & Net Sales
If net sales is $100 and discount is $20 then Gross Sales will be $100 + $20 = $120
In another example, imaging a food chain, ABC is making $1 million in sales in a year.
This would be the gross sales of the company. Now assume that the chain also offered $50,000 words of discounts throughout the year, plus also it provided a refund of $10,000 to the customers in that year.
Then net sales of the company will be-
$1,000,000 – $50,000 – $10,000 = $940,000
Hence, the income statement of the food chain will have $1 million of gross sales and $940,000 for net sales.
Gross Sales Wrap Up!
We have already established the fact that the gross sales of a company are significant for success. So, when you want to ensure the success of your company, you need to put some focus on that.
On the concluding note, we hope you would have understood the importance of gross sales, ineffective sales management of your business.
What are your thoughts about the importance of gross sales in business channelization? Share your views with us in the comments below.
This blog is a school of business. Thanks for the lessons.