Calculate Net Sales: What Small Businesses Need to Know (+ Examples)

Calculating net sales is a love-hate type of task. On the one hand, it's rewarding to tally your sales—look at your business go! On the other hand, accounting can be a demanding and complicated job—especially where taxes are concerned. Whether you find calculating net revenue to be a fun task or just an important one, we know a few tips and tricks to make it easier. We've compiled some ideas to make net sales calculation as easy as a bit of data harvesting and some Grade 5 math. In this article, we walk you through how—and why—to calculate net sales. We also share some examples of how to use these figures to improve your business—and boost those numbers for next year.

What are net sales (aka net revenue)?

Net sales—also called net revenue—is the total amount of money that a company earns from the sale of its products or services minus certain deductions, including returns, discounts, and allowances. Let’s say you run a retail store. The total amount of money you make from selling your products in-store or online is your gross sales volume. Any deductions applied in making those sales—including customers who return previously bought products, discounts on items, or accepting a lesser margin on damaged product (called allowances)—subtracted from your gross sales = your net sales volume! Net sales numbers are critical accounting metrics for any business that generates revenue from the sale of a product or service. Net revenue is often calculated on a weekly, monthly, or annual basis to paint a picture of your company’s real sales performance by excluding any sales that did not result in an overall positive profit. Because of this, tracking and understanding net sales—both company-wide and by product or service line—is critical to accurate financial reporting. It's also important to performance auditing, strategic decision-making, and ensuring adequate cash flow. Net sales is also important to compliance with tax filings and other financial regulations. Here are some other accounting metrics that relate to these metrics, but that serve different purposes.

Net sales vs. gross sales

We mentioned that gross sales are the total sales revenue that a company earns from selling its products or services. This is a whole figure, kind of like gross pay, that doesn’t include any deductions. Net sales, on the other hand, subtracts deductions—hence the distinction between net and gross. To calculate your net sales, you first need to calculate your gross sales.

Net sales vs. net income

Your net income—aka your bottom line—is the profit that a company makes after all expenses have been deducted from their total revenue. This includes deductions from sales, along with company operating expenses, taxes, interest payments, labor costs, and more. Net sales is calculated before these additional deductions. Since it only takes sales returns, discounts, and other sales allowances on sales revenue into account, it's a simpler calculation than net income.

Net sales vs. gross profit

Gross profit is the difference between net sales and the cost of goods sold (COGS). This metric includes direct costs associated with producing your products or services, and is used to measure the efficiency of production and pricing. Net sales is a starting metric to help you calculate gross profit. For example, if net sales equal $90K, and COGS equal $40K, then your gross profit would be $50K.

Net sales vs. revenue

Revenue is the total income you generate as a company, across all business activities. This includes sales, interest, and other income sources. Net sales refers to income—or revenue—specifically generated from sales (minus deductions). It’s similar to revenue, but is focused purely on income generated from sales activities.

Why is calculating net sales important?

Net sales figures give you a clear picture of how much revenue you’re bringing in from sales of your products or services. Sales, of course, are one of your company's biggest revenue drivers. Understanding exactly how much income you’re generating from sales is critical to the financial health of your business! Here are five reasons why calculating net sales is a smart business move.

1. Provide accurate financial reports.

Net sales provides a picture of how much revenue you’ve generated from your sales activities. Having this figure is a requirement for filing accurate financial statements for tax and accounting purposes. It's also important when reporting the state of your business to any stakeholders, investors, and lenders.

2. Measure your company's performance.

Calculating net sales helps you understand the efficacy of your sales, marketing, and customer satisfaction strategies. When you analyze your net sales—specifically, your deductions—you can pinpoint potential problem areas like high return rates or profit-cutting discounts. Likewise, total net sales are the first step to calculating net sales by product line or marketing channel. These minutiae can help you identify what strategies are driving the most revenue and which ones aren't performing. These insights can then be used to inform future sales and marketing campaigns, new product development, and other strategic growth areas.

3. Budget, forecast, and grow.

Budgeting and projecting your business revenue into the future is one of the basics of small business money management, but you can’t budget and forecast without first understanding net sales. When you understand how much you're regularly bringing in from sales, you can more easily set sales goals for the future. Forecasting can also help you identify how much you can spend on growth strategies—and where they're sorely needed.

4. Analyze your business's profitability.

Your net sales figures are the first—and required—step to calculating other important financial figures like gross profit and net income. Collectively, these figures illustrate your overall profitability. When you understand your small business's profitability, you have a higher degree of control over costs and can optimize your pricing strategy. In other words, calculating last month's results are the first step to boosting next month's!

5. Comply with tax laws—accurately.

Accurate net sales figures are required for tax calculation and compliance with various regulations. For example, reporting your business’ performance to the IRS each year requires an annual net sales volume. What's more, Generally Accepted Account Principles (GAAP)—an accounting standard that dictates regulation for publicly traded companies—stipulate that companies should prepare financial statements that include a breakdown of gross sales, net sales, and similar financial metrics.

How to calculate net sales.

The net sales formula is: Net Sales = Gross Sales - (Returns + Allowances + Discounts) Here’s a breakdown of each of the variables in that formula. Gross sales is the total revenue that your business generated from all sales, before any deductions. For example, if your business sold 1,000 units of a product for $100 each, the gross sales on those transactions would be $100,000. This includes all transaction types across all channels, including brick and mortar and online, and via cash, credit card, debit card, gift card, or bank transfers. Returns are the value of all goods returned by consumers, or all refunds given for services. This includes both full and partial refunds from a variety of potential causes, including faulty products, customers changing their minds, and complaints about customer service. As an example: if a customer returns goods worth $5,000 during a given reporting period, that amount will be deducted from your gross sales when calculating your net sales. Allowances are price reductions given to a customer due to product defects or damages, or any other issue with an item or service provided. These aren’t full refunds, but rather partial credits that mark down the difference between the listed price and the adjusted price the customer pays. For example, if a company sells $3,000 worth of defective goods, and offers a 50% credit on those goods to customers, the net sales amount for that product would be $1,500. That's $3000 in gross sales minus $1,500 in allowances. Discounts—a.k.a. markdowns—are reductions in the selling price for a product or service. These include sales, promotions, coupons, and any other incentive for the customer to make a purchase. In a net sales calculation, the discount variable refers to the total amount of money taken off of sales within a specific period of time. For example, if your company offers a 25% discount on a product worth $100, the net sale amount for one unit would be $75.

When to calculate net revenue and sales.

Every company will calculate net revenue and sales at different intervals, depending on their financial obligations and strategic planning cadence. Here are some common timelines for calculating net results:

• Monthly. Monthly calculations can help you keep a close eye on sales performance. This allows you to quickly identify issues, like a spike in returns, or opportunities, like a particularly popular product segment.
• Quarterly. Quarterly calculations are often required as part of providing financial reports and statements to stakeholders, investors, and regulatory bodies. For example, a business may need to provide a statement of earnings each quarter to their investors as part of their agreement with those partners.
• Annually. Annual calculations are also required for general financial reporting. In addition, you’ll likely need to calculate net sales annually as part of your tax filings to the IRS.
• On-demand. Lastly, you may need to calculate net sales on-demand and as required. This might be to respond to audit requests, applying for loans, or when analyzing sales performance and financial health.

Regardless of when you calculate net sales, it’s always a good idea to keep close tabs on this financial metric. Consider it a KPI for your business that helps you understand how you’re performing and where you can improve operationally.

Examples of net revenue calculation.

Before we close out, let’s look at two examples of net sales or revenue calculations. These examples are designed to demonstrate the various considerations that need to be made when calculating net sales, depending on the scope and complexity of your business.

Example 1: Brick and mortar clothing retailer

EpicChic is a brick and mortar clothing retailer that owns a single location. They sell exclusively through their store, with no online sales. The store runs regular promotions for specific brands and product lines. They’ve just finished running a Labor Day promotion and need to calculate net sales for the period of the promotion. This will help them understand how successful their promo campaigns were, especially when compared against their regular net sales numbers. Total gross sales for the sales period were $32,000, with $26,000 coming from items with promotional discounts. The promotion for this campaign knocked off 25% for buyers. In addition to discounts, EpicChic customers also returned $1,200 in products, with $300 being written off as allowances due to a few faulty products. Isolating for just the promo campaign, EpicChic’s net sales calculation would look like this: $26,000 - ($6,500 + $1,200 + $300) = $18,000 Total net sales for this campaign, therefore, came out to $18,000. EpicChic can now take that number and compare it to similar campaigns to see how this round of promotions performed.

Example 2: Hybrid brick and mortar and online pet food store

Fetch Flavors is a pet food store that sells through both a brick and mortar location, as well as through an online store. They’re performing a quarterly audit of their sales channels to understand where they generate more revenue: online, or brick and mortar. Pricing across the two sales channels is the same; however, promo offers and discounting differ. The e-commerce teams push higher volumes of product online, but also tend to offer deeper or more widespread discounts. There’s also a trend of higher rates of return from online sales. To manage their calculation, Fetch Flavors isolates the sales volumes in their POS and online store to Q1 of that year. They pull gross volume by channel, along with returns, allowances, and discounts. The figures come out as followings for Q1: Gross Sales:

• Brick and Mortar: $43,500
• Online: $56,250

Returns:

• Brick and Mortar: $1,250
• Online: $8,525

Allowances:

• Brick and Mortar: $800
• Online: $1,300

Discounts:

• Brick and Mortar: $6,500
• Online: $9,800

Totals for brick and mortar breaks down like this: $43,500 - ($1,250 + $800 + $6,500) = $34,950 For online, that breakdown looks like this: $56,250 - ($8,525 + $1,300 + $9,800) = $36,625 This net sales analysis tells us that, while gross sales from the e-commerce store are significantly higher than brick and mortar results, net sales are almost the same regardless of location. This indicates that the trend of deductions applied to online sales is having an effect on the bottom line. Online returns, in particular, might be an area of concern and focus for Fetch Flavors going into Q2.

Start calculating your small business's net sales.

Of course, to calculate your business's net sales, you need to collect all the right data! Your point of sale system, e-commerce platform, and personal books should have all the info you need to put these numbers together. But if you're finding your numbers are scattered and hard to locate, there's support to make these calculations a breeze. Many POS platforms integrate with Homebase—including Shopify, Square, Lightspeed, and PayAnywhere—to compile all your sales numbers in one place. That makes it easy for you to calculate the necessary info you need for taxes while also seamlessly managing your payroll and hourly teams. Plus, Homebase's easy data collection allows you to sync employee data with sales data to enable more efficient labor reporting. The result? A more streamlined financial process that gives you more time to manage the rest of your business. Try Homebase for free today. {{banner-cta}}