What Are Net Sales and How Do I Calculate Them?

If you’re a business owner that sells products or services online or in a brick and mortar store, then you need to understand the net sales metric.

Net sales is one of the most important financial measurements for retail and ecommerce businesses, because it shows how much revenue you’re generating after accounting for certain deductions.

In this article, we’ll look at what net sales is, how to calculate it, and why it’s important. We’ll also provide examples of how a net sales calculation works in a real business, and what insights you can (and can’t) gain from it.

What is net sales?

Net sales is the total amount of revenue a business generates from sales after accounting for discounts, customer returns, and other deductions.

It’s one of the top line metrics you’ll see on the income statement of product-based businesses, and it’s usually measured over weekly, monthly or annual accounting periods.

Why is net sales important?

• Understand the financial health of your business
• Identify issues with discounts and returns
• Inform pricing decisions

Net sales is an important metric because it shows how much sales revenue your business is bringing in. It gives you a big-picture overview of your net income from sales, which is fundamentally one of the biggest revenue drivers you’ll have.

This metric can be used to measure total sales growth over time, track how well you’re managing discounts and returns, and identify areas of your sales operation that need improvement.

There are three main benefits that measuring net sales revenue can provide you, as a business owner.

Understand the financial health of your business

Net sales can give you an idea of how successful your business is by comparing it to previous periods, or to your competitors. It’s something you need to know when measuring growth and the sustainability of your cash flow over the long term.

This information can be used to make informed decisions about future product lines, variations, distribution methods, and other key parts of your business strategy.

It’s also a key metric you need when calculating how profitable you are. If you use gross sales instead in a profit calculation, you’re likely to overestimate your company’s profitability.

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Identify issues with discounts and returns

Because net sales includes revenue forfeited from discounts, it’s a great way to understand the impact discounts are having. With this metric, you can begin to understand if offering markdowns on the listed sales price is causing you to lose too much revenue compared to the uplift in conversions it brings.

Net sales can also help you identify if your customers are returning products at a higher than average rate.

Knowing this, you’ll be able to make decisions around product quality, the accuracy of your advertisements, and the reliability of your shipping methods.

Inform pricing decisions

The net sales calculation also helps you make better strategic decisions around pricing. By looking at how much total revenue you’re driving from sales, you’ll have a foundation on which to make decisions about the factors that can increase it.

Net sales can help you determine whether you should expand your business, invest in new marketing initiatives, or offer different discounts.

How to calculate net sales

• The net sales formula
• Gross sales
• Sales returns
• Sales allowances
• Discounts

You can calculate net sales by using the net sales formula. The net sales formula involves a number of different variables, so let’s take a closer look.

The net sales formula

The net sales calculation is simple:

Net sales = Gross sales – Discounts – Sales returns – Allowances

So start with your gross sales number, then take away any deductions that have been made.

Let’s define what those terms mean.

Gross sales

This is the total amount of revenue your company has brought in from sales, before any deductions.

You’ll typically look at this figure on a weekly, monthly, quarterly, or annual basis. It’ll cover all payment options, whether that’s via cash, credit card, debit card, gift card, or bank transfers.

Sales returns

This is the amount of money you’ve given back to customers when they return goods they bought from you.

It includes both full refunds and partial refunds, and could be caused by faulty products, poor customer service, misleading advertising, or a customer changing their mind.

Sales allowances

Sales allowances are price reductions given to customers for issues where a full refund isn’t necessary.

In this case, instead of returning an item for a full refund, the customer chooses to keep it in exchange for a discount. So if an item arrived with cosmetic damage but is still usable, the customer might want to keep it instead of going through the effort of returning it. Here, you’d give a partial discount, and you’d mark the difference between the listed price and the adjusted price under “allowances.”

Other reasons for sales allowances might be that the product specifications differ from what was advertised, or they didn’t receive part of their order.

Discounts

Discounts, sometimes known as markdowns, are price reductions made by the seller to incentivize sales.

In the net sales calculation, the discount figure will refer to the total amount of money knocked off your sales within a specific period of time.

Sales discounts can be offered when customers buy in bulk. Seasonal demand fluctuations and overstocking can also be a good reason to drive sales with reduced prices. You might also offer discounts when promoting new products to encourage customers to try them.

Some businesses offer discounts for quicker payments. For example, if they usually invoice with Net 30 payment terms, they could give a 5% discount for early payments made in 14 days or less. In consumer retail, this isn’t so common, because payment is usually made upfront.

Is net sales the same as profit?

Net sales and profit are not the same thing.

Net sales is a metric that shows how much money your business has brought in after subtracting sales-related deductions. But it doesn’t account for the cost of goods sold (COGS). That’s the cost of materials, assembly, packaging, distribution, facilities, equipment, marketing, and all the other overhead that go into making the goods.

Gross profit is the total amount of money that’s left over after you subtract all of those expenses from your net sales.

Net sales – COGS = Gross profit

Gross profit margin is a ratio showing the percentage of each dollar you bring in that is profit.

(Gross profit / net sales) x 100 = Gross profit margin

Net profit is your gross profit minus the indirect costs of operating your business that don’t fall into COGS. This would include costs like taxes, salaries, depreciation, administration, and other operating expenses.

Gross profit – expenses = Net profit

Net profit is another one of the most important retail metrics—at the end of the day, it’s the money that’s left in your pocket. That’s why it’s also known as the bottom line, as it’s usually shown at the bottom of a financial report.

Examples of the net sales formula

Now that we’ve explained what net sales is and how to calculate it, let’s take a look at an example of how it plays out in the real world.

Here’s how two small businesses might find this figure by looking at revenue from their sales transactions.

Example 1: Net Sales for an apparel retailer

Let’s consider Redania Apparel, a fictional online-only clothing retailer that sells directly to consumers through its ecommerce platform. It wants to know its net sales for the last quarter before it makes a decision on future growth ideas.

Here, we’ll use net sales figures for them over a three-month period. We’ll calculate it by subtracting total discounts from gross sales.

$100,000 Gross sales

– $12,000 Sales returns

 – $2,000 Allowances

 – $4,000 Discounts

= $82,000 Net sales

Clothing brands typically have the highest rates of return, at around 12% of sales. So their return rate isn’t too shocking—but can it be optimized? Redania Apparel might use this insight to rethink how it can deal with returns more profitably. That might include tweaking its returns policy or providing better sizing information so customers are more likely to get something that fits them.

Example 2: Net Sales for a particular product line

Let’s imagine Ectotherm Coffee, a fictional coffee brand that operates a small number of coffee shops in the northwestern United States. It’s famed for its cold brew coffee, selling cans of it both through its online store and via in-store local pickup.

While the café is doing just fine, the owners want to track how well the cold brew cans are selling and spot any inefficiencies or problems within that product line. It starts with calculating the net sales over the last quarter, which was summer—the most popular time for this product.

In-store, each coffee shop sold an average of 10 cans each day, six days a week. Over three locations. That makes for 180 units per week.

Online, it sold an average of 10 four-packs per week. That’s 40 units each week. That’s 220 total units each week.

At $4 per can, that makes for $880 per week, $3,520 per month, or $10,560 for the quarter.

Therefore, this product’s gross sales for the quarter were $10,560.

There were some sales returns—a few batches were a little off, so some online customers asked for refunds. In-store returns were low, though. So returns totaled $500 for the quarter.

Some of those bad batches led to allowances—while the flavor wasn’t the best, some customers were happy to keep and consume the product when offered a discount coupon for their next order or a partial refund. These totaled $250.

Finally, discounts are included in the calculations. One flavor wasn’t flying off the shelves, so its price was reduced for a few weeks, plus the brand trialed a volume discount for larger orders that turned out to be pretty popular. Total discounts added up to $1,000.

Here’s the final net sales calculation for the quarter:

$10,560 gross sales

– $500 sales returns

 – $250 allowances

 – $1,000 discounts

= $8,810 net sales

Now that Ectotherm Coffee knows the net sales for this product line, it can decide whether to invest more in it or change up its strategy.

When is net sales not a useful metric?

Net sales is a high-level metric that doesn’t always tell the whole story.

The above calculation doesn’t tell us the profit Ectotherm Coffee is making on each can of cold brew. It doesn’t take into account the cost of sales (or COGS) for its items—without it, we can only see the company’s revenues that the items are driving.

But it’s a great starting point. From here, the owners can begin to investigate how they can improve operational efficiency and profit per item sold.

It usually sheds light on the sales performance of an entire business, especially when it’s reported on financial statements. But there’s no reason you couldn’t calculate it for specific product lines, SKU numbers, locations, or other categories, like we did above in the second example.

For small businesses, calculating net sales for certain product lines might not actually be necessary in the short term, because if there’s a quality issue that’s driving lots of returns, you’ll probably notice it before it’s time to look at financial statements.

Calculate net sales for your store

Now that you understand net sales, it’s easy to calculate it for your own store. It’s simply your total income generated by sales, minus any returns, allowances, and discounts.

It’s an important metric to understand because it can give you an overview of how your business is doing. It’s also helpful for understanding trends—if net sales decrease over time, that could be a sign that you need to make some changes in your business. If they change during particular seasons, you can use that insight to plan your stock levels and promotions accordingly.

It’s not the only metric you’ll need to measure the performance of your business, but it’s one of the most fundamental—which is why it’s so crucial to use.

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