What are 'Net Sales'
Net sales are the amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed. The sales number reported on a company's financial statements is a net sales number, reflecting these deductions. Because deductions from the gross sales are represented in the net sales figure, net sales gives a more accurate picture of the actual sales generated by the company or the money that it expects to receive.
BREAKING DOWN 'Net Sales'Net sales measures the true top line of a business instead of the bottom line. For this reason, net sales typically do not consider the cost of goods sold, administrative and general expenses, or other costs typically factored in when determining operating income. Investors review net sales when examining a company’s income statement to determine whether to invest in the business.
If the difference between a company’s gross and net sales is greater than the industry average, the business may be giving customers a high discount or may have a substantial amount of returned merchandise. Comparing the company’s monthly income statements may help determine and solve problems before they grow.
Factors Affecting Net Sales
Gross sales are used when calculating net sales. Gross sales account for cash, debit or credit card, and trade credit sales during a preset time before subtracting discounts, merchandise returns and allowances. If using cash accounting, gross sales include those for which payment has been received. If using accrual accounting, gross sales include every cash and credit sale.
Sales returns and allowances lower net sales. Customers returning items anticipate a refund. Damaged or defective merchandise sold in its current condition may result in a price reduction or allowance. For example, a customer returns $2,500 in merchandise, and $2,500 is subtracted from gross sales. Similarly, a customer purchases $2,500 worth of defective merchandise, receives a $500 allowance, and $500 is subtracted from gross sales.
Sales discounts also lessen net sales. Discounts encourage customers to pay invoices before a preset date. As a result, the company brings in cash more quickly and reduces its accounts receivable. For example, a customer receives a $20,000 invoice with a 5% discount if paid within 20 days. The discount is $20,000 x 5% = $1,000. Therefore, the $1,000 discount reduces gross sales to $19,000.
When calculating net sales, returns, discounts and allowances are subtracted from gross sales. For example, Store A has gross sales of $400,000, discounts of $6,000, returns of $20,000 and allowances of $46,000 at month end. Because $400,000 - $6,000 - $20,000 - $46,000 = $328,000, net sales are $328,000.
Example of Net Sales
In May 2016, Walgreens Boots Alliance reported a net sales increase of 2.4% for the first nine months of fiscal year 2016. Net sales increased to $29.5 billion in the fiscal third quarter, 18.4% higher than the same period the previous year.