You probably have heard the term gross sales somewhere before. It’s a really important metric for a business, though a lot of the time its importance is highly inflated. Whilst being a good indication of the sheer volume and overall cash flow for a business, gross sales can’t show you everything about the business. In this blog, we’ll look over everything you should know about when it comes to gross sales!
What are Gross Sales and how to calculate them?
The term gross indicates a figure before the deduction of taxes, costs, or any other contributions. So, gross sales are used to describe the total amount of money a business received after selling. It’s the sum of all sales and other figures (if applicable). To see the exact formulas which can be used to calculate gross sales, look at the graphic below.
Gross Sales Formula
Gross Sales = Sum of All Sales
Gross Sales = Net Sales + Discount + Sales Returns + Sales Allowances
Gross Sales vs Net Sales?
If the term gross is used to describe money earned before deductions, the term net is used to point out money after these deductions. The gross sales figure is always higher than Net Sales because you have to pay taxes, cover the cost of raw materials, employees, etc.
- A company manufactures and sells golf clubs
- It made and sold 100 sets of golf clubs, each for 999$
- The total gross sales is 999$*100 sets = 99,000$
- However, it cost the company 45,000$ to make these clubs and they spent another 25,000$ on employee costs and marketing for this set
- This means that the Net Sales figure is 99,000$-45,000$-25,000$=29,000$
- The total money which the company earned after selling these many golf clubs is actually 29,000$
Which figure better reflects the financial benefit of the company - 99 thousand or 29 thousand? It’s really simple to see why the latter figure provides more accuracy. It’s the actual money your company makes.
Net sales will always be more important to businesses. That’s just simple economics, really. You could be operating at a billion-dollar-a-week volume (1 billion gross sales/week), but if your net sales are 0$, then you’re earning absolutely nothing. Investment analysts state that tracking gross sales and doing analysis of this figure only pays off to consumer retail businesses. Only after companies compare it against their rivals does it offer any kind of significant benefit. Taxes are another reason why gross sales could be important to keep track of. Putting them in your income statement might be required by your local tax inspectorate or the investors might want to see it.
However, when compared to Net Sales, the Gross Volume of sales made can be misleading as it doesn’t show the actual efficiency and profitability of the business. It can often inflate the value of a business on paper and it has to be shown next to Net Sales for maximum unbiasedness.
What the Gross Sales figure won’t tell you?
Competent accounting and finance experts know what the gross sales figure can tell you, but what about the things that it won’t tell you? It’s more often the case that people are aware of the gross sales figure and how to calculate it, but they overstate its importance. We’ll make a list of important items that gross sales figures can’t tell you:
- How did your profits change over time - even if you compare gross sales throughout a period in time, a 5% increase from Q1, for example, doesn’t mean that your profits grew 5%. These figures need and must be calculated completely separately.
- How efficient are you at handling and minimizing costs/expenses? Gross sales only show what you got in total (e.g., revenue). They’re not reflective of how costs affect your profits.
- How good your pricing strategy is? Unfortunately, gross sales cannot show you which products are your best-sellers and which ones are lagging behind. It only gives a basic understanding of consumer spending habits over a period of time, but without any specific detail.
How to boost gross sales numbers?
If you want to increase your Gross Sales numbers (which usually, but not always correlate with increased profits), you must increase overall sales or better your pricing strategy.
To begin with, you need to increase spending on marketing. But don’t do that in vain. Either refine your target audience and their habits in-house or hire an ad agency to do that research for you. If you can target the right people at the right time, you will definitely get more sales as a result. Depending on the demographic, which you’re targeting, you should focus your efforts on a single platform like social media, radio, TV, physical advertising, etc.
The chart below will help you find out a few steps towards boosting sales!
The next step is to refine pricing. You can do that by asking your current or potential customers for their feedback via surveys or questionnaires. Better pricing means more approachable products and maximum value for your business.
Be discoverable and communicate via channels like social media, phone, email. If your customers and enquirers can reach out, ask questions and get answers, you’ll be much better off.
Finally, we recommend investing in customer experience, so things like packaging, unique and personalized gifts, newsletters, etc. If you’re able to cover every single area which we’ve just mentioned, you will definitely see an increase in sales across the board!
So, as we have established, gross sales are an important financial figure with a few drawbacks. Tracking it is useful, but you should be more focused on stats like Net Sales and Profits instead of just sheer volume. There are a few things that this metric tells you and a whole lot which it doesn’t. So, don’t expect gross sales to show you how successful your business truly is, because it just can’t do that. Look at the gross sales numbers as a reference point which can help you find weak spots in your branding, pricing strategies or cost management.