What Is the Net Sales Formula? (And How to Calculate It)

By Indeed Editorial Team

Published 16 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Net sales is an important figure to help professionals analyse a company's financial health. Professionals use a net sales formula to calculate the net sales figures for a company or client. If you're employed in the finance, management or business field, you may benefit from understanding how to calculate net sales. In this article, we explain what this formula is and why it's important and share how to calculate net sales for a company with an example calculation for you to reference.

What is a net sales formula?

The net sales formula helps professionals calculate the revenue a company generates from sales transactions for a given period. This formula accounts for different factors that affect the actual sale price of a product, such as product returns and promotions. By including these aspects, the net sales calculation can provide a more accurate representation of a company's sales revenue.

For example, if a company made 200 sales within one month but processed 50 returns, it doesn't earn the revenue from those 50 returns. The net sales calculation accounts for this and deducts the number of returns to ensure the company only counts the profits of the units they sold and doesn't process any refunds.

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Why are net sales important?

By calculating net sales figures, companies get a better idea of how they're actually performing and their overall financial health. Analysts commonly use net sales to understand the true conditions of a company's revenue. By applying a net sales calculation to gross sales numbers, the result is an adjusted revenue number that accounts for the costs businesses incur to make sales. Companies can also use net sales to determine if they have high deductions that they can reduce.

By looking at net sales information on financial reports, business leaders can make better decisions to improve their revenue by implementing different strategies. For example, if they notice they have a high number of returns, they might investigate why customers are unhappy with a product. Similarly, if a company notices that there are a high number of defects in a product, they might consider switching manufacturers to fix this issue.

What components does the formula include?

To calculate an accurate net sales value, this formula includes the values of different business costs. Certain business expenses can affect net sales, such as:

Sales returns

Sales returns refer to products that customers request a refund for. Customers typically also surrender the original product when requesting a refund, but in some cases, such as for restaurants, there is still a cost for the product that was already incurred. This means that the company may be required to pay for the cost of a refund and disposal of the item. It's important to include the sales return value when using the net sales equation because if you don't, the net sales value may be too high, as it adds to the profit of a sale when there isn't one.

Allowances

Allowances occur when a company negotiates for a lower price for an item. This may happen if a company receives a defective item, were billed incorrectly or receives the wrong number of items, so they ask a manufacturer for a partial refund. If a company negotiates an allowance with their supplier, they typically receive reimbursement in the form of credit on the next invoice. Allowances in this context differ from those a company can write off, which is important to note when gathering figures for calculating the net sales formula.

Discounts

Discounts refer to the price reductions that a company may offer a customer and are a common sales tactic utilised by many companies. It's important to account for discounts when calculating net sales because if you don't, the net sales value may be higher than what is accurate for the company during that period. Including discounts as a percentage or value allows companies to calculate the total revenue they make from discounted items and add it to the revenue value of regularly priced items.

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How to use the net sales formula

When creating financial reports for your employer or a client, you can calculate net sales in a spreadsheet by following these steps:

1. Format your spreadsheet

Many professionals use spreadsheets to create financial reports and track a company's sales. Start by formatting your spreadsheet into two columns in which column A features the names of sales aspects and column B features their values. Here's an example of what your spreadsheet may look like:

A**B**Number sold100,000Number returned10,000Number of defective products1,000Unit price$2.00Discount10%Sales value for discount$1,400Unit price reduction$0.40### 2. Calculate gross sales

To calculate gross sales, the formula is the number of units sold multiplied by the price per unit. You can type =B1*B4 into an unused cell, such as C1. In the above example, B1 represents 100,000 units and B4 represents a sales price of $2, which gives you this calculation:

Gross sales = 100,000 X $2.00 = $200,000

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3. Deduct sales discounts

To calculate the value of discounts, multiply the discount percentage, found in cell B5, with the sales value of discounted units, found in B6. Type =B5*B6 into another new cell, like C2. Using the numbers from the example spreadsheet, you may get this calculation:

Sales discount = 0.10 X $1,400 = $140

4. Deduct sales returns

To calculate returns, multiply the total units returned by the unit price. This can show what the retail value is for the total numbers of returns. After finding this number, you can deduct it from the gross sales value. For this example, you can type =B2*B4 in C3 or another unused cell.

Sales returns = 10,000 X $2.00 = $20,000

5. Deduct allowances

The formula for allowances is the number of defective units multiplied by the price reduction per unit or =B3*B7. Since your employer can't sell any items that have an appearance or functional defect, deducting the price of the defective units helps find a more accurate net sales value. By typing this formula into C4, you can calculate your allowances.

Allowances = 1,000 X $0.20 = $200

6. Calculate net sales in a new cell

After re-formatting the spreadsheet, you can use the new information you have to calculate net sales in a new cell. Take your gross sales, from cell C1 and subtract the sum of your deductions from cells C2, C3 and C4 and then type that calculation into a new cell, C5, by using the following formula:

  • Net Sales = C1 - (C2 + C3 + C4)

Net sales = $200,000 - ($140 + $20,000 + $200) = $200,000 - $20,340 = $179,660

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Example of calculating net sales

To gain a better understanding of how to calculate net sales, you can review this example:

Mary's Motorcycles is a popular motorcycle company, whose accountant is interested in calculating net sales for the company's financial statements. The company sold 2,000 motorcycles over the statement period, during which customers returned three units and five were defective or damaged. Each motorcycle costs $10,000, and the company sometimes applies discounts of 2%. The value of discounted units for the period is $40,000, and deductions for slightly damaged units are 10%. The company's accountant calculates gross sales by multiplying the number sold by the per-unit price:

Gross sales = 2,000 X $10,000 = $20,000,000

Next, they calculate discounts by using the sales value of discounted units multiplied by the discount:

Discounts = $40,000 X 0.02 = $800

Now they calculate sales returns. This is the total number of returns times the unit price:

Sales returns = 3 X $10,000 = $30,000

Then they calculate allowances by multiplying the number of defective units by the price reduction per unit:

Allowances = 5 X $1,000 = $5,000

To find the net sales value, the accountant adds up the company's discounts, sales returns and allowances and subtracts that number from gross sales:

Discounts + allowances + sales returns = $800 + $30,000 + $5,000 = $35,800

Net sales = $20,000,000 - $35,800 = $19,964,200

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