What is Net Sales?
Net sales is one of the most important sales KPIs to monitor. It represents the total revenue a business earns after deducting returns, discounts, and allowances from gross sales over a specific period. Tracking net sales helps provide a clearer view of actual revenue and supports the calculation of other financial health metrics.
Although cost of goods sold (COGS) is not included in net sales, it is calculated by subtracting the following deductions from gross sales:
- Sales discounts offered to customers
- Sales returns
- Allowances (such as partial refunds or price adjustments)
Outside analysts and investors may use net sales to compare a company’s performance with industry benchmarks.
Example Of Net Sales
Assume you are the owner of a boutique clothing store. Your gross sales revenue for the month is $5,000. However, some merchandise was discounted by 50%, resulting in $500 in discounts. Additionally, some items were returned because they did not fit or were unwanted gifts, totaling $400 in returns. Lastly, a customer reported that a $200 jacket ordered online was damaged during delivery. The customer chose to keep it, and you offered a 40% partial refund as a goodwill gesture. This results in an $80 allowance.
These deductions are subtracted from the total sales revenue to calculate net sales:
- $500 in discounts
- $400 in returns
- $80 in allowances
Total deductions = $980
Net sales = $5,000 − $980 = $4,020
So, the store’s net sales for the month is $4,020, which is a little over 80% of gross sales.