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.
So how exactly can you ensure your forecasting accuracy?
A good place to start is understanding your total sales and revenue, which involves tracking gross sales and net sales.
In this article, you learn the difference between gross sales vs. net sales and how to calculate your sales revenue and net sales to 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.
Key takeaways for gross sales vs. net sales
Gross sales refer to the total value of all sales before deductions like discounts, returns and allowances.
Net sales show the revenue remaining after those deductions, making the metric more useful for evaluating sales performance.
Comparing gross sales and net sales helps SMBs understand demand, track profitability and assess the company’s financial health.
Pipedrive helps sales teams track revenue, monitor sales performance and build more accurate forecasts. Try it today with a 14-day free trial.
What are gross sales vs. net sales?
Before learning how to calculate gross sales and net sales, it’s important to understand what these sales metrics are and how they differ.
What is “gross sales”?
Gross sales definition: Gross sales refers to the total value of all sales before any deductions are applied.
Gross sales focus on the overall sales activity generated by selling products or services within a given period, without accounting for returns, discounts or allowances.
What is “net sales”?
Net sales definition: Net sales refers to the revenue remaining after deductions are subtracted from gross sales.
Net sales focus on the actual revenue a company retains after returns, discounts and allowances reduce the original sales amount.
What’s the difference between gross sales and net sales?
When it comes to the question: “What is net sales vs. gross sales?”, the key difference lies in how each metric reflects revenue.
As shown below, gross sales represent the total value of your company’s sales. Net sales, on the other hand, show the revenue remaining after deductions (including discounts, returns and allowances).
Deductions reduce the original sales value. As a result, net sales figures are generally lower than gross sales, meaning net sales provide a more accurate view of your company’s total revenue.
Why SMBs should track gross sales and net sales
Small business owners should track both gross sales and net sales, as each provides different insights into a company’s performance.
Gross sales calculations help business owners understand demand and revenue generation.
Net sales calculations provide a clearer picture of a company’s profitability.
Looking at both sales metrics together gives business owners a clearer view of their company’s financial health and helps them make smarter financial decisions.
Calculating your gross sales vs. net sales
Now you know the difference between gross sales and net sales – and why SMBs need to track both – let’s look at how to calculate these metrics.
We’ll start by clarifying the formulas for calculating your gross and net sales/net revenue.
How to calculate gross sales
Gross sales is the total amount of sales without any deductions. Understanding gross revenue vs. gross sales is also important, as gross revenue includes other business income, such as royalties and interest.
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
How to calculate net sales
Net sales, defined as the sum of your gross sales minus any deductions – such as discounts, returns and allowances – includes details we’ll look at later. The closer your net sales are to your gross sales, the higher your profit margin. Here’s a formula for net sales in accounting and finance:
Net sales formula:
Net sales = Gross sales - deductions (i.e., discounts, returns and allowances)
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 vs. net sales
Basis for Comparison | Gross Sales | Net Sales |
Definition | Total sales with no deductions | Total sales after deductions |
Interdependency | Not dependent on net sales | Dependent on gross sales |
Amount | High | Comparatively less |
Formula | Units sold x Sales price | Gross Sales Deductions |
Deduction of expenses | Less operational expenses | Less non-operational expenses |
Relevance | Not as relevant | Relevant in decision-making |
How to add gross and net sales on an income statement
Gross income/sales and net income/sales 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 identifying the gross sales and deductions and simply list the net income or net revenue. This omission raises the question: is annual revenue gross or net?
Understanding the distinction is crucial for accurate financial reporting.
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).
Depending on your accounting system, returns, discounts or allowances may also appear as offsetting entries that affect the related debit and credit records in your general ledger.
When the income statement is finished, you can use this information to calculate your sales tax and inform your future sales activity.
How do deductions fit into the equation?
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 each type of deduction in more detail.
1. Discounts
Sales discounts apply to any early payment discounts 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 due within 30 days. However, you could offer a 1% sales discount if they pay within 10 days (this particular offer would be known as a 1/10 net 30 discount).
In that case, the customer would pay only $9,900, receiving a $100 discount for early payment during that 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 the 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.
2. Returns
Sales returns allow customers to return an item for a full or partial refund within a specified period.
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.
Returns are a cost you have to consider when calculating net sales.
Once the order is 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.
3. Allowances
If there are minor issues with the delivered product after a sales transaction, but it is still usable, the seller and customer may agree to a compromise known as an allowance.
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 your customer ordered $3,000 worth of your product but received the wrong color. While the product still functions correctly, the customer may request compensation because the delivered goods weren’t as described. To keep the customer happy, your company might offer a $300 partial refund.
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 allowances would need to be deducted from the sum of all sales, giving you a figure of $7,000 net sales vs. a gross sales figure of $8,000.
4 benefits of knowing your gross sales and net sales
Let’s take a look at some of the benefits that come with understanding and analyzing your gross and net sales.
1. Avoid misleading figures
Calculating both figures will give you a clear understanding of your actual 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.
2. Make better decisions
Analyzing gross and net sales helps guide your decision-making process by giving you real insight into your sales performance so you can make informed and strategic business 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 your net sales indicate that one of your products is being returned more than usual, you can use this information to identify the problem. Then, you can make changes to provide a better product or service to your customers.
Pipedrive in action: Software company Kovai.co upgraded from basic sales data compiling tools to Pipedrive. Making the switch allowed the company to use data (including gross and net sales) to generate forecasts and modify its sales process.
As a result of these changes,Kovai.co boosted its income and grew its team by 50%.
3. Run a competitive analysis
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.
4. Motivate your sales team
If you know the difference between gross and net sales company-wide, team-wide and individually, you can accurately measure and analyze 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.
Focusing on these KPIs 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.
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How to use net sales vs. gross sales to identify (and overcome) challenges
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 gross sales and net sales is decreasing, 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 are some common causes of widening gaps between gross and net sales, along with advice on getting your sales back on track.
Your early-payment discount is impacting revenue
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.
Early payments give 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, re-evaluate the early payment terms. Here’s where you begin:
If the discount percentage is too high, bring it down. 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.
Align with competitors’ early-payment reductions. Do a competitor analysis to see where you stand. 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 might offer 7% to reduce your loss of revenue and still beat your competitor.
Offer a shorter early payment time frame to reduce the number of users. For instance, if you reduce the window from 30 days to 14, there’s a lower chance that customers will fulfill the payment by the deadline. You can offer the same discount while reducing pressure on your overall revenue.
You have an increasing number of product returns
Your gross sales might look great, but if your business is getting a lot of returns, your net sales will show it.
For example, if returns increase between reporting periods, the gap between gross sales and net sales will widen. The chart below shows how deductions like returns can reduce net sales even when gross sales remain stable.
In this example, gross sales remain consistent between reporting periods, but net sales drop in Q2. This widening gap suggests that more revenue is being lost to deductions such as returns, discounts or allowances.
If you’re experiencing an increase in returns, start by identifying the main cause.
If you have return authorizations in place, you’ll be able to see the reasons for returns. The results can indicate opportunities to improve the manufacturing, quality control, delivery or other sales processes to reduce the number of returns.
For sales teams, the biggest concern is whether products are returned because they don’t meet the buyer’s requirements.
This issue could mean that your product needs redesigning, or that your sales process is targeting the wrong people. In this case, review your ideal customer profile to make sure you’re reaching out to the right people.
You’re providing too many allowances
Continually offering allowances not only impacts your revenue, but it can also make it harder to accurately forecast 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 shipping delays, you know where to look to put things right.
Note: When measuring business performance, it’s important to understand the difference between gross revenue vs. sales and revenue vs. gross sales.
- Gross revenue represents the total income generated by a business,
- Sales refers to the revenue generated from selling products or services.
- Revenue and gross sales both represent the total income generated from sales. However, revenue may be calculated after deducting any returns, discounts or allowances.
Accurately tracking and analyzing these metrics can help businesses identify areas for improvement, optimize their sales strategies and make informed decisions to drive growth and profitability.
Use Pipedrive to manage your revenue
The revenue management software in Pipedrive’s CRM allows sales teams to track revenue, sales (including gross and net sales) and invoices – all from one location.
Instead of relying on spreadsheets or manual templates, your sales team can easily access key information from wherever they are. With Pipedrive, they can share instant updates with one another and use the software’s reporting and analytics to delve deeper into their sales performance.
Final thoughts
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.
Understanding gross sales vs. net sales revenue 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.
Pipedrive’s CRM can help you track these key indicators and automatically generate forecasting reports. Sign up for a free 14-day trial of Pipedrive today to get started.
