What Is the Net Sales Formula?
Net sales are one of the first things you can expect to see on an income statement, so its vital to make sure that youre providing accurate figures. Fortunately, calculating the figure for net sales is relatively simple, as long as you have access to a couple of key pieces of information. Get the inside track on the formula for net sales with our definitive guide. Well explore the net sales revenue formula, provide an example of how to find the net sales formula for your business, and explain some of the uses of the net sales formula. Read on to find out more. The formula for net sales explained  In a nutshell, net sales are what youre left with after deducting sales returns, allowances, and discounts from your gross sales. This makes it a fundamental calculation for your businesss financial statements. Mathematically, the net sales revenue formula can be expressed in two ways:  Net Sales = Gross Sales  Sales Returns  Allowances  Discounts  or  Net Sales = (Total Units Sold x Sale Per Unit Price)  Sales Returns  Allowances  Discounts  There are a couple of terms that you may not be familiar with in these formulas for net sales, so lets explore the constituent elements in greater depth:  Gross sales  the total, unadjusted figure for your businesss sales revenue before sales returns, allowances, or discounts are factored into the equation. Sales returns  the return of goods in exchange for a refund. Allowances  price reductions for damaged or defective goods. Discounts  rewards extended to customer invoice when certain conditions are met, i.e., if you offer net 30 payment terms, you may decide to provide a 5% discount if an invoice is paid in full within 14 days. As you can see, you wont be able to work out your net sales revenue formula without a solid grasp of your businesss sales data. Example of the net sales formula  To see how the net sales formula works in practice, lets look at an example. Company A sold 25,000 units over the financial year, with each unit retailing for $20. However, they also had sales returns worth an estimated $40,000, allowances of around $60,000, and discounts of $20,000. The net sales formula can provide your business a much more accurate insight into its actual revenue, giving you a far clearer picture of your overall financial health. After all, if you dont have a robust understanding of the costs that your business incurs when making sales, its difficult to determine whether youre succeeding. Analyzing your companys net sales formula can help you make more informed decisions. For example, if your net sales ended up being lower than you budgeted for, you may need to consider lowering your prices to attract more customers. How to handle the net sales formula in accounting  Typically, youll need to record net sales in your companys general ledger. In most cases, youll record the gross sales first, followed by discounts and deductions. Then, youll need to post the figure for net sales. After youve registered net sales, youll need to generate an income statement, adding your net sales to your firms other revenue streams. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.