When analyzing any business’s income potential, gross sales are typically examined in close detail. This is because it is a universal concept across all industries. While certain industries benefit more from the examination of gross sales, all businesses strive to have the highest gross sales they can achieve.
Understanding the gross sales metric is important for developing well-curated corporate performance management. This is because the message it conveys is simple and straightforward and it is a useful barometer for how the business is performing in its market over time. In this glossary term we will discuss what gross sales is, how to calculate it, why it is important, the difference between it and net sales, and how analysts use it when assessing a business.
What Are Gross Sales?
In simple terms, gross sales represents the sum of all receipts from sales before discounts, rebates, and returns. Certain industries focus heavily on gross sales, such as retail, while others view it in conjunction with other key financial metrics.
Calculating Gross Sales
The simplest way to calculate gross sales is to gather all receipts for the period in question and total them. Do not include any additional deductions to the sales number. This is important as gross sales represent the topline value in the gross profit calculation. Typically gross sales less rebates, discounts, and returns, is considered net sales, which is used in the gross profit calculation.
Why Are Gross Sales Important?
Gross sales is a useful metric for assessing a business’s ability to generate income. The metric is heavily relied on in the retail industry but is used in other industries as well. Gross sales as a value is rarely analyzed on its own but it does give FP&A analysts an idea of how much income potential a business has.
When examining gross sales analysts are able to get an idea of the business’s ability to capture overall market share. Additionally, retail chains use gross sales to assist with planning orders and stocking. However, the metric is rarely used on its own.
Typically analysts will utilize both gross sales and net sales together to paint a more informative picture of the quality of income a business has.
Using Net Sales And Gross Sales
While gross sales represent the total sales before discounts, returns, and rebates, net sales reflects the value of sales after accounting for those things. The difference between the two values is what helps analysts to determine the quality of income. Net sales helps to assess how many dollars in revenue stays with the business for every dollar in gross receipts.
How Analyst Use Gross Sales
As we mentioned, gross sales is used heavily in the retail industry, but almost always in conjunction with net sales. This is because the resulting spread between gross and net sales helps analysts to identify if it is possible to give customers allowances and discounts. It also helps to assess how much product is being returned.
When charted over time, gross and net sales help identify if there are issues in the quality of a product and if the customer base is responding to it adversely. For example, if gross sales are high, but net sales are low and it is primarily due to returns then it helps analysts identify a need to increase product quality.
Additionally, it helps to identify if the market is responding well to price points. If gross sales are high but net sales are low due to increasing allowances and discounts it helps analysts to identify if the customer base does not consider the price of the product to be commensurate with the product itself.
Taken on its own, gross sales is often a metric without context. For example, it is difficult to assess if gross sales are considered high if you do not know the average gross sales for the overall industry or for similar products. Consequently, it is important to be able to pin gross sales against some other information in order to make it more useful.
While many consider net sales a more relevant metric, gross sales still has its place. It is used to help analysts determine how much market share is being captured and how much customer outreach initiatives are working. Plotted over time, it can help to identify if the market is responding well to new products or marketing campaigns. This is because these types of activities are expected to generate more sales, regardless of the resulting net sales.
Gross sales are typically not reported on the income statement. Usually, net sales is reported as total revenue. This makes it difficult for externally facing analysts to identify the spread between gross and net sales. Therefore the metric is primarily used internally among corporate finance professionals in the CPM process.
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