Accurate sales forecasting is critical to your success. It paints a picture of where your business is going, sets realistic quotas for your sales team and helps you make informed business decisions.
Despite its importance, a study from Gartner found that only 45% of sales leaders have high confidence in their forecasting accuracy. But how exactly can you improve your forecasting accuracy?
A good place to start is to understand your total sales and revenue, which involves keeping tabs on gross sales and net sales.
In this post, we’ll show you how to calculate your net and gross sales so you can create accurate sales forecasts. We’ll walk you through the formulas, outline their differences and show you how to identify issues or opportunities within the sales process.
Let’s start by clarifying the formulas for calculating your gross and net sales.
Gross sales is the total amount of sales without any deductions.
To calculate your gross sales, simply multiply the number of units you’ve sold by the unit price. So, if you sold 200 units in Q1 and the unit price is $40, your gross sales revenue (also called gross profit) is $8,000 for that quarter.
Gross sales formula:
Gross sales = Number of units (gross sales price) x Unit price/cost
Net sales is the sum of your gross sales minus any deductions, such as discounts, returns and allowances (we’ll look at these deductions in more detail later). The closer your net sales are to your gross sales, the higher your profit margin.
Net sales formula:
Gross sales = Number of units (gross sales price) x Unit price/cost
As all the deductions have to be made retroactively, you can only calculate your net sales at the end of the sales period.
Gross sales and net sales will feature in your financial statements, specifically as the top line on the company’s income statement (also known as a profit and loss statement).
A business might start by declaring its gross sales (commonly referred to as gross profit or total gross revenue), then listing the different sales deductions made as line items (which are the net sales). Other companies skip the part of identifying the gross sales and deductions and simply list the net income or net revenue.
If the deductions aren’t on the income statement, you’ll find them in your company’s contra accounts (an account used in a general ledger to offset the balance of a related account).
When the income statement is finished, you can use this information to calculate your sales tax and inform your future sales activity.
There are three specific types of deductions to consider when it comes to gross vs. net sales: discounts, returns and allowances.
Gross sales incorporate all of these deductions, while net sales are a company’s gross sales minus these three deductions.
Let’s look at them in more detail.
Sales discounts apply to any early payment discounts which are offered to customers when they pay an invoice within a specified period.
For example, your company might send a customer an invoice for $10,000 to be paid within 30 days. However, you could offer a sales discount of 1% off if they pay within 10 days (this particular offer would be known as a 1/10 net 30 in discount terms).
In that case, the customer would only pay $9,900, getting a $100 discount for early payment in that specific period.
The exact terms of a discount vary from company to company, but the general idea is to create a mutually beneficial outcome for both parties. The seller gets their invoices paid faster, allowing them to maintain a healthy cash flow, and the customer doesn’t have to pay full selling price.
In this context, “sales discounts” doesn’t refer to sales promotions, promotional discounts or rebates and seasonal offers, it only applies to the early payment discount.
Sales returns allow customers to return an item for a full or partial refund within a certain number of days.
From damaged goods to late deliveries, customers can decide to send the product back for a variety of reasons, and as long as they’re in line with your return agreement, they can request a refund.
This is a cost you have to consider when calculating net sales.
When the order has been returned, the refund is credited to the customer’s account. Regardless of whether you’re able to resell those items again or not, the refund needs to be deducted from your gross sales and gross income.
If there are minor issues with the delivered product after a sales transaction but it is still usable, the seller and customer might agree to a compromise. Rather than the customer having to return the goods, the seller could propose a partial refund against the paid invoice. This discount would then be recorded as an allowance.
For example, imagine that your customer ordered $3,000 worth of your product, but they receive the wrong color. While the product still functions correctly, the customer might ask for compensation given that the delivered goods weren’t as described. To keep the customer happy, your company might offer a partial refund of $300.
In terms of gross and net sales, let’s say your gross sales for Q1 were $8,000, but over the same period of time, there were $700 in sales discounts – $200 in sales returns and $100 in sales allowances. These would need to be deducted from the sum of all sales. This would give you a figure of $7,000 net sales vs. a gross sales figure of $8,000.
Let’s take a look at some of the benefits that come with understanding and analyzing your gross and net sales.
While it can be tempting to rely on gross sales as a measure of performance (as it’s always going to be equal to or higher than the net sales), it can be misleading. If you’ve had to refund most of those sales, you’re not using accurate sales numbers for your forecasting.
This is where reviewing net sales alongside gross sales comes in handy.
Gross sales allow you to measure the total amount of revenue made by your sales team, whereas net sales are a better measure of performance, sales tactics and product/service quality.
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.
Analyzing gross and net sales helps guide your decision-making process. It gives you real insight into your sales performance, which helps you make informed and strategic decisions.
For example, a key part of sales forecasting involves setting a realistic budget. Based on your gross and net sales, you can see where to allocate spending, how much to allocate and where spending might not be necessary.
It can also inform decisions about your product or service. If your gross sales are high but net sales indicate that one of your products is being returned more than usual, you can use this information to identify what’s wrong. Then, you can make changes to provide a better product or service to your customers.
As well as a general indication of your business’s financial health, net and gross sales can also be a benchmark for competitive analyses.
Compare your own figures with competitors to see how you’re performing in the marketplace and identify new opportunities and areas of improvement in your existing sales processes.
For example, if your net sales figures are considerably lower than your competitors, there’s cause for investigation. You may need to adjust your pricing, amend your product features, or upgrade your product quality to gain a competitive advantage.
On the flip side, if your net sales are consistently higher than your competitors, it shows that you’re doing something right. As a result, you can confidently double down on your strengths and make smart business decisions for the future.
If you know the difference between gross and net sales company-wide, team-wide and individually, you can accurately measure and analyze performance. This means you can monitor sales performance and set goals that motivate your sales team to focus on the right targets.
For example, if you dig a bit deeper and analyze your top-performing rep only to find out that most of their gross sales are cut in half when considering net sales, perhaps their deals aren’t as valuable as they seem.
You could use these metrics to help steer this rep, and the team, in the right direction. You might bundle your set gross sales KPI with qualified leads and most likely to close KPIs. This forces your reps to focus on high-budget and high-quality deals in tandem, motivating them to prioritize big business and high-value business equally.
Understanding the differences between gross and net sales puts you in a good position to spot when sales aren’t going to plan.
For example, if the gap between the gross sales and net sales is decreasing, that means the rate of deductions is also decreasing. In other words, your sales process is in good shape.
On the other hand, if the gap between the two is increasing, something’s not right. You’ll have to do some detective work to diagnose the cause.
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.
Net sales show you how many customers are using your early-payment discount. If these discounts are increasing, it means more of your customers are paying their bills promptly. This gives your business a healthy cash flow, but if the discount is too high or if too many customers are using it, it can affect your final sales figure.
In this situation, you need to re-evaluate the early payment terms. Here’s where you begin:
Take a look at the percentage. If the percentage of discount is too high, bring it down so that it no longer impacts your total revenue quite as much. The exact amount will vary from business to business, so work out how much you need to deduct from the percentage based on the impact it’s already had on your sales.
Analyze your competitors. If your competitors are also offering early-payment reductions, take a look at what they’re doing. That way, you can try to retain a competitive advantage without negatively affecting your cash flow. You might need to reduce the discount you provide early-paying customers. But if you’re offering 10% and your competitors are offering 5%, you can still offer 7% to reduce your loss of revenue and still beat your competitor.
Review the time frame. Offering a shorter time frame to make the early payment can reduce the number of people that use it. For instance, if you used to provide 30 days but now offer 14, there’s less chance customers will fulfill the payment by the deadline. You can offer the same discount but reduce the pressure on your overall revenue.
Your gross sales might look great, but if your business is getting a lot of returns, your net sales will show it.
If you’re experiencing an increase in returns, start by identifying the main cause. Usually, there are return authorizations in place to record the reason for a return. If that’s the case, you’ll be able to see whether there are any opportunities to improve the manufacturing, quality control, delivery and other sales processes to reduce the number of returns.
For sales teams, the biggest concern is if products are returned because they don’t meet the buyer’s requirements. This could mean that your product needs redesigning, or that your sales process is targeting the wrong people. In this case, you’ll need to review your ideal customer profile to make sure you’re reaching out to the right people.
If you find your business offering allowances on a regular basis, something needs to change. Continually offering allowances not only impacts your revenue, but it can make it harder to accurately forecast your future sales.
Review the reasons behind the allowances and see if you can spot any common themes.
For example, if 80% of allowances are due to a delay in shipping, you know where to look to put things right.
Pipedrive’s revenue management software allows sales teams to track revenue, sales (including gross and net sales) and invoices – all from one location.
Instead of clicking back and forth between various Excel spreadsheets, Your sales team can easily access key information from wherever they are, share instant updates and use our reporting and analytics to delve deeper into their sales performance.
While gross sales vs. net sales are terms that may be more familiar to accountants and investors, knowing what these mean as a salesperson or sales manager is still vital. It can give you a strong indicator of business performance and help identify any potential issues before they become serious problems.
Understanding gross sales vs. net sales and tracking how the figures change over time will let you see what’s holding your sales back and review your processes to improve performance across the business, including your sales process.
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