Gross Sales - What Business Owners Need to Know

By: First Union | Date:

business-financeresources

Gross Sales - What Business Owners Need to Know

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Having insight into how your business is performing is critical. The decisions you make, the money spent, even the day to day operations are all directly affected by the way your finances stand. One of the key indicators of how a company is doing financially is gross sales. Collecting and subsequently analyzing this information can most definitely help you to understand the direction things are headed and what potentially your long term plans should look like to either redirect or keep things moving forward. In this article, we will look at the concept of gross sales and provide a formula that will enable you to easily calculate this number.

Understanding gross sales

Gross sales, also called top-line sales, represents the total amount of products/services sold over a given period. Again, this number reflects the total of all sales reported, this therefore means that it will not include allowances, discounts, or returns. So once a product and/or service sells and is in the customer's hands, in a manner of speaking, then the resulting revenue is incorporated into a business's gross sales. Used especially regarding retail sales, this number becomes extremely helpful for analyzing a company's size versus its profitability. Over the year, how has the company grown? In looking at the numbers, management can tell quite a bit about such annual growth.

Gross sales versus revenue

The terms gross sales and revenue are frequently interchanged. However, there are a couple of key differences between the two concepts. It indicate the total amount of money coming in as a direct result of the sale of goods/services. Whereas revenue, on the other hand, represents the total of all money coming in, so that could also include other sources beyond what the business sells. For example, if a company has investments that are paying off, the resulting income from this would be included in the revenue category.

Gross sales versus net sales

Gross sales and net sales also have a few differentiating factors. In analyzing a financial statement, both of these become very important in terms of understanding how well a company is doing and how effectively they are utilizing their resources. Net sales, disparate from gross sales, represents the total amount of sales but also takes into account relevant deductions. The gross sales formula will look like the following:

Units sold x Sale price

When compared with net sales, gross sales will of course be a higher number, as again net sales reflect deductions that are subtracted from the gross sales amount. Net sales also, therefore, paint a more accurate picture of a company's financial standing as it factors in operational and nonoperational costs.

How to calculate

Essentially, you will add up all of the sales invoices over a specified period. You are focusing primarily on sales price—so again, do not factor in discounts, rebates, and the like. It thus stands as:

Gross Sales = Total of all Sales Invoices

Even if an item is returned or it is discounted at the cash register because of a defect for example, when adding up the gross sales, you will not include anything of this nature. Strictly focus on the actual sale price. The net sales will then account for returns, discounts, and so forth.

Why do you need to know this?

A pretty relevant question given that gross sales are not factoring in all of the details and can thus be said to paint a bit of a skewed picture, but it is helpful to know what your gross sales are…Any company is out to be profitable. This goes without saying. Gross sales reflect how much you are making against the overall cost of the product. It can help you determine your breakeven point, and of course, once you reach this breakeven point you can start turning a profit.

Your cash flow is also impacted by gross sales. That is to say, a company will invest money to acquire inventory or make more products to sell. When you can sell for a considerable markup this then means that you have more cash coming in than went out to acquire/make the product. Gross sales also help you to predict sales trends moving forward and this in turn can give you better insights into an investment strategy for future business growth.

Understanding pricing strategies

Gross sales are tied to pricing strategies that are influenced by the marketplace. So generally speaking, when you price your goods/services you will often do so with an eye on your competitor and price accordingly. To surpass the competition, you will use marketing strategies and other such tactics to try and make your product the more popular one.

One fairly common tactic is to lower your price and thereby make it more attractive than what your competitor has. This can ultimately help you to increase your sales. Yet another strategy is to raise your prices and in this way maximize the value of the sale. And while people do tend to prefer lower prices, if you have an effective branding and marketing campaign behind it, it could work to your advantage in the end. Just be careful that you don't price too high and also ensure that yours is a market that supports such a strategy.

Predominantly it's used by retail-based businesses to try and show the number of items that a company is selling about its major competitors. When reflected on an income statement it needs to be done so in tandem with net sales and deductions to reflect a more accurate picture of a firm's financial position.

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