What are Net Sales?
Net sales are the amount of sales a company makes after certain deductions, such as expenses, have been taken. The term can vary a bit depending on the company using it, but most companies differentiate net sales from gross sales. Gross sales are, quite simply, the total of all sales without taking into consideration other factors.
The other factors that get determined when a business calculates net sales can vary, but they most often include two specific things. One of these is that people can return items they purchased, and that has to be reduced from the gross sales amount. Especially if the item gets resold, there can be difficulties calculating true amount of sales, because it can look as though there are two sales, where in reality there is only a single sale, a return, and then a resale of the same item.
While some items returned are then resold, another common scenario occurs when an item is returned because it is defective. It can’t be resold, but gross sales receipts will still count it as having been sold. To get a net amount, defective items returned are subtracted from gross sales amounts so that the item isn’t misinterpreted as having been profitably sold.
There can be other instances where the net amount drops further, including when discounts are taken after a sale. A woman buys a blouse and then notices it is missing a top button. She takes it back to the store and instead of returning it, asks for a reduction in the price. The store might grant the reduction, which would be a good way to maintain customer loyalty, but then would have to subtract that reduction from net sales. Moreover, sometimes gross sales are calculated through the original item prices of things. If these are discounted before they are sold, the discounts may need to be subtracted from the gross to arrive at net sales figures.
The terms gross and net often relate to income and how much money a seller makes. Usually, net income and sales are two different things. Net income refers to amounts a seller makes after all things have been considered, such as employee pay, advertising, rent, utility bills, and et cetera. It’s possible to have net sales that appear profitable, but still have a net income that isn’t. If sales don’t make enough to pay all the other costs of operating a business, the seller can be operating at a loss. On the other hand, high net sales could suggest that businesses will be profitable ventures, and sell much more than it costs to run the business.
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