Understanding financial performance in a particular period of time is one of the critical features of any successful business strategy even it is a long-term or short-term plan. Entrepreneurs never ignore their financial statement because they all know that failure or bankruptcy can naturally happen as a result of the imbalance in return on investment, for example.
Therefore, business organizations have tried to collect sales data and analyzed their profit from the very first start. Among sales data, gross sales are regarded as a helpful identifier that reflects the financial performance of an organization in an obvious way.
To help you have an in-depth understanding of this element, this guide will explain the definition, roles, limitations, and the formula to help you calculate your gross sales easily.
- What is Gross Income?
- What is the conversion rate? Definition – Calculate – Example
- Cost of goods sold: Everything you need to know
Now, let’s get started!
Table of content
- What are gross sales?
- The comparison between gross sales and other financial definitions
- How to calculate gross sales
- The importance of gross sales
- The limitation of using gross sales
What are gross sales?
Gross sales, known as top-line sales, are the total of all product and service sales reported by an organization during a period. Because gross sales are the total unadjusted sales, no returns, allowances, rebates, or discounts are included. To make it easy to understand, we can consider gross sales as the revenue from the products that have actually moved off the shelves and sold to the customers.
Gross sale is a common measure used in retail businesses to compare overall organizational size and annual growth. In other words, we can say that total sales tell more about a company’s size than it does its profitability.
The comparison between gross sales and other financial definitions
Gross sales and revenue
Gross sales and revenue are often used interchangeably; however, there is a slight difference.
While gross sales are the total income generated by a company from its sales, revenue is its total income, which comes from not only sales but other sources. Therefore, revenue can reflex the ability of the company to allocate resources, investment, and earn more money, whereas the selling capability of the company in the market is indicated by gross sales.
Gross sales and net sales
Similarly, these two entities are integral parts of the financial analysis of the general business income. They help to analyze how effectively and efficiently the company’s resources are being utilized.
However, gross sales are the total amount of sales without any deductions, while net sales are the total amount of sales, but after deductions from the gross sales. Therefore, we have the following formula to calculate gross and net sales
Gross Sales = Units Sold * Sales Price
Gross Sales = Units Sold * Sales Price
Compared to net sales, gross sales are always higher because net income is derived from deductions made from gross sales.
Needless to say, net sales is always dependent on gross sales.
In terms of expense deduction, the operational expense deducted from gross sales, while we can see non-operational expense in net sales deduction.
What matters is that net sales are much more relevant in decision making than gross sales. They give a much more precise picture of the current financial position of a company.
How to calculate gross sales
We can calculate gross sales by adding together all the sales invoices during the specific period. Remember to add the selling price before deducting discounts, rebates, returns, or any allowances.
Gross Sales = Sum of all the Values in Sales Invoices
Let me take an example. Store A has three invoices with details provided below:
- Invoice 10: the net sales after the return were $30, $10 of goods was returned
- Invoice 11: the net sales were $100, and $20 was for the discount
- Invoice 12: because of a small defect, $15 of allowance are given to the customer, and he only needed to pay $50
Now, we are going to add all the sales in each invoice together.
The total sales of store A will be Invoice 10+ Invoice 11+ Invoice 12
The sum: $225
The importance of gross sales
Determine the break-even point
Because gross sales show how much money you make against the cost of the product, it is considered a starting point to achieve a healthy net profit. It is especially true for startup since the higher gross benefits they gain, the quicker they can reach the break-even point and start earning profits from the very basic business operation.
Affect cash flow
Cash flow is under the influence of gross sales. Companies typically invest in inventory costs to make or acquire more products. When you sell inventory for a significant markup profit, you can convert each unit into greater cash that your original investment.
Besides, when you have the ability to turn sales and inventory in profit quickly, it will be so much easier to invest more money in business expansion. Based on your gross sales and sales trends, you can boost your cash flow and enhance reinvestment strategy.
Gross sales-based pricing strategies
Gross sales are often decided by pricing strategies, which is based on competitive market pricing.
Typically, your products will be priced similarly to that of the competitor. In this case, you will get the standard profit; however, you must try to market your products to sell more.
In some cases, you can accept to lower your price, but still, this can lead to increased sales because you offer the best price point in the market.
Another pricing strategy is to sell your product at a higher price than the market to maximize your sales. It seems to be weird because we assume that people prefer low-cost shopping.
However, it is not like that. A significant branding campaign often accompanies the high pricing strategy. In such a case, you are really selling their brand as much as the product to gain sales at a higher price.
Remember that this strategy can work in some markets, but it does come with the initial risk of selling to a market that is comfortable buying at a lower price.
The limitation of using Gross sales
Gross sales are only relevant to companies that operate in the consumer retail industry, reflecting the amount of a product that a business sells relative to its major competitors.
A company has to decide to present gross sales, deductions, and net sales on different lines within an income statement. When gross sales are shown on a separate line, the amount of sales figures presented is overstated, which misleads readers from determining the total of the various sales deductions.
We have presented a guide to what are gross sales and discussed the formula to calculate gross sales along with its roles and limitations. Gross sales are the critical number that matters a lot to any business, particularly for those operating in the retail industry, for example, to file tax returns periodically.
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