Gross sales are the measure of the total sales generated by a business over a given period of time. These include the sales through both cash and credit. Gross sales do not take into account the discounts offered by the company and neither does it include the expenses incurred in carrying out the business. Let us try to understand the concept of gross sales with the help of this example.
Suppose you are the owner of an electronics store and want to know the gross sales over a period of time, say a year. You sold a total of 1,000 TV sets, 500 mobile phones, 500 ovens over a period of one year. The TVs were priced at $300 each, the phones at $200 and the ovens at $100. So, your gross sales would be 1000 ×300 + 500 ×200 + 500×100 = $450,000.
So, you have made gross sales worth $45,000. This figure is exclusive of the salary that you pay to your employees, the taxes that you are liable to pay and the day-to-day costs associated with carrying out a business. Gross sales is expressed as,
Gross sales = Net Sales + (Customer discounts, taxes, misc. expenses)
Gross sales are important for a business as it helps in tracking down the number of units that have been sold, but economists are of the opinion that businesses should look at their net sales more closely than the gross sales. That is why studying gross sales and net sales of your organization is of importance before coming to a conclusion of profitability of your business.
When you make a sale, it is not necessary that you have derived the profit. There are instance when the customers change their mind and return the product in the first fortnight or a month.
There are instances when the customers issue you a fraudulent check or their credit card numbers are wrong or fake. In these scenarios too, you may make an entry that a sale has been made, but you wouldn't realize the profits.
The consumer buys a product from you and instead of making a full payment, makes a small down-payment and promises to pay the remaining amount in equated monthly installments. Due to any reason, if the customer fails to pay the installments, then the process of a sale wouldn't be completed.
Gross Sales Vs Net Sales
Net sales is the revenue that a business makes after all the deductions, returns and cancellations. It takes other factors like damaged, stolen or missing products into account as well and is one of the most accurate calculation of the sales made by the company. While preparing the income statement of a company, the net sales figure is listed rather than the gross sales figure. To know whether a business has made a profit or a loss, the expenses of running the company like the administrative costs, marketing costs are subtracted from the net sales.
As mentioned before, gross sales are indicative of the performance of a company, but they do not reveal the complete picture. If you are thinking about investing in a particular company, you should always look at the net sales of a company, rather than the gross sales as gross sales are often far more impressive than the actual sales made.
For example, a company can claim that it made $100,000 in gross sales, but after deducting all the other factors, if the net sales come down to $75,000 and after subtracting the administration and marketing costs, the company may have made a profit of only $50,000. It is from this $50,000 that the company has to payback the investors, pay salaries, administer the organization etc. So, from an investor's point of view it becomes very important that you take a look at the complete picture.
This was a bit of information on gross sales. We hope that this brief information will help you in getting a basic idea about this topic and acquaints you with some of the terminologies associated with calculating the sales of a company.