Net purchases represent total sales less purchase discounts, returns, and allowances. Companies report this figure at the top of the income statement for each accounting period. Purchase discounts include all monies taken off the original purchase price of a good, such as 10 percent off large orders. Returns may be all items a buyer sends back to the company due to overordering or allowed returns for dated merchandise. Allowances include any special, one-time offerings for broken items or improperly shipped goods.
Companies separate financial sales information in this manner so internal and external stakeholders have a better understanding of sales revenue. The net purchases figures also provide information on whether a company is falsely boosting sales. For example, a company may send several large orders to buyers. A portion of these orders may come back as the buyers recognize errors. Comparing total sales against high returns should allow stakeholders the opportunity to discover these errors.
When a company has low net purchases, it can indicate the company is offering significant discounts to move merchandise. This is often the case during sluggish economic periods where buyers are content with fewer purchases. Discounts are also more frequent during specific times of the year. For example, near or after holidays and the end of weather seasons are popular times for discounts. Companies can move merchandise quickly with higher discounts in order to avoid product obsolescence.
Another reason for higher discounts and low net purchases include small discounts that induce buyers to pay bills quickly. An example is payment terms such as "1/10 Net 30." In this scenario, buyers receive a 1 percent discount if they pay the bill within 10 days of receipt. Otherwise, the full invoice is due in 30 days of receipt. The discount will go against total purchases and result in lower net purchases as the discount increases.
Sales allowances can impact companies negatively and should be infrequent. Even so, when they happen, the companies are most often at fault. If a company ships goods improperly, it must replace them. Product damaged during shipment that is reimbursable by shippers will be offset by payments from the company.
Most companies will keep track of their net purchases. This allows the company’s management team to ensure that discounts, returns, or allowances do not significantly hamper overall sales. Companies will most often expect higher discounts during the previously mentioned times; copious discounts or returns at other periods may need further review. As discounts and returns will lower sales, profits will decrease as well. Lower profits can result in less money reinvested into the business and fewer operational improvements.