Net sales are the most accurate reflection of your small business's well-being and efficiency. All businesses use the net sales formula to calculate the number of net sales every quarter or for a period of time. Do you run your own small business? Have you brought in enough net sales? Is your business going to be profitable? Net sales help you understand the financial health of your small business. It is essential to understand and familiarize yourself with the
formula so as to use it effectively to profit your small business. Understanding financial metrics and resource management is the crucial while setting up any small business plan. This is required for both short-term or long-term perspective. Business owners must never ignore their financial operations, especially net sales. The bottom line is, just a minor mistake can make a business lose a considerable amount of money. It is one of the reasons why entrepreneurs are always trying to analyze their net
sales operations and profitability from the moment they start up their small business. This article will be going through some of the terms associated with Net sales, such as Net Income (or net profit), Gross Sales, Income Statement, and Profit Margins. This will help you calculate your net sales and focus your attention on the
profitability of your small business. The term
Net sales refer to the revenue that a company reports after making several calculations and deductions from the gross sale. For example, such as returns, discounts, and allowances are subtracted from the gross sales. Net Sales is calculated by deducting any returns, discounts, and allowances from Gross Sales. It is represented on the income statement of a company. The formula for calculating Net Sales is give below: Some small businesses usually do not provide any transparency in the area of net sales. Net Sales may not apply to every business or industry because of different components of its calculation. The costs associated with net sales will affect the gross profit and gross profit margin of the business. Net sales do not
include the cost of goods sold, also known as COGS, which is usually the primary driver of gross profit margins. If a business has any returns, allowances, or discounts, then adjustments are made to identify and report net sales. Most small businesses report gross sales, then net sales and sales cost in the direct costs portion of the income statement. Sometimes, they may
report net sales on the top line and then move on to the costs of goods sold. In summary, net sales do not account for the cost of goods sold, general expenses, and administrative expenses, which are analyzed with different effects on income statement margins. Gross sales overstate a company’s actual sales because it includes several other variables that cannot practically be classified as sales. Hence, gross sales on their own are not too accurate. Source: www.wallstreetmojo.comNet sales are a more accurate reflection of a company’s operations and can be used to assess the company's true turnover. Net Sales is used for coming up with strategies for the sales and marketing teams to improve future revenues. The gross sales amount is typically much more significant in numbers than the net sales amount. This is because it does not include returns, allowances, or discounts. The net sales amount, which is calculated after adjusting for the above variables, is lower than the gross sales amount. Since the irrelevant metrics are removed while calculating net sales, it is a better reflection of the company’s turnover and health. Hence, net sales are the metrics usually employed for decision-making purposes for the business. How to Determine Net Sales, Net Income, and Profit Margins?
While net sales are the amount shown by the business's actual sales during a period or time frame. Net income is the amount of substantial income earned from net sales and other operations of the business. What is Net Income?Net income is defined as the income remaining after subtracting all costs, expenses (production & administration, and selling & distribution), loss on the sale of assets, interest (long-term debt), taxes, and preference dividends from net sales. Hence, the net income is dependent on the net sales. Source: www.wallstreetmojo.comThere are two ways net income is maintained. Small businesses can either hold net income in retained earnings or distributed as dividend among the equity shareholders. Earnings per share can also be calculated by dividing the total number of shares from the net income. It is the net increase in the equity shareholders find. The top number is gross sales, and the different components are deducted to derive net sales. Gross profit is calculated using net sales and not the gross sales numbers. Let's say the discrepancy between the gross and net sales numbers is very high. It can be a red flag for the business as it may not be reporting sales correctly, or the quality of revenue for the company is not good. Take this example below: Gross Sales =$20,000 Sales Returns = $200 Sales Allowance = $300 Discounts = $300 Net Sales/Revenue = $20,000 – ($200+$200+$300) = $19,400 Cost of Goods Sold = $6500 Gross Profit = $19,400-$6400 = $13,000 Net Profit Margin = ($13,000/$19,400)*100 = 67% What are the Terms used in Net Income?You need also have to understand the following terms to calculate net income correctly:
Why is Net Income Essential for Your Small Business?Net Income is an indicator of how successful your small business is. Net income indicates that a business is making money. It provides you with useful information on the health of your business. In order to track net income for your business, you should be able to track both revenues and expenses properly. If expenses and taxes outweighed revenues, the business would experience a net loss. Net income, unlike gross income, shows you just how much money you have leftover after all of your expenses have been paid; Net Income is also used for comparing performance over the years and serves to show the growth trend for a company. Net income comparisons from year to year can provide you and your accountant with a way to track business growth and financial health over a period of time. For instance, if your net income remains stagnant or decreases over a period of three to five years, you may need to find ways to cut expenses or increase revenue. While a steep incline shows that your business is growing in a healthy manner from year to year. Net Income provides investors with the financial data they need Good net income indicates that a small business is financially stable, with enough money left over to pay their bills. It also provides useful insight into whether a small business is likely to remain successful. Net income is one of the first things that investors and financial institutions will look at. Net Sales are used finally to calculate the Profit margin, the most critical metrics for any small business to look at to know the company's health. What is Net Profit Margin?Net profit margin is a percentage of net profit over net sales. Net Profit Margin = (Net Profit/Net Sales) * 100 The ideal net profit margin varies over time. This is because it depends on your industry, your small business's age, and stability and the goals set for the future of business.
How to Increase my Net Profit Margin?There are several things you can do to help increase net profit margin, including looking at your cost of goods sold. Are you paying too much for materials? Are there ways you can reduce labor costs, or make labor more efficient? You may also want to look at operating costs to see if there are expenses you can cut. Finally, you can look to increase net profit revenue by adding another product or service, or increasing the selling price of your current products. However, you’ll need to have sufficient justification to do so or your customers may take their business elsewhere. Limitations of Using Net Sales
We hope understanding net sales and other financial terms helps you run your small business in a better manner. When used correctly, net sales is a useful calculation for both you and your management to measure how well the business is selling its goods and services. While other numbers such as gross income and gross profit are also important for different reasons, net income is the bottom-line number that investors and banks want to see. The net sale is a fundamental factor in the income statement; thus, every business needs to track and manage it with care. The easiest way to calculate your net income is by using accounting software for invoicing and sales management. www.deskera.comWhile the number can be calculated manually, using accounting software's such as Deskera Books helps track revenue and expenses accurately, providing you with a net income figure that you can trust. We have finally reached the end of this article. To summarize the take away from fro above :
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Is bad debt expense subtracted from net sales?Alternatively, a bad debt expense can be estimated by taking a percentage of net sales, based on the company's historical experience with bad debt. Companies regularly make changes to the allowance for credit losses entry, so that they correspond with the current statistical modeling allowances.
Where is bad debt expense reported?The bad debt expense appears in a line item in the income statement, within the operating expenses section in the lower half of the statement. It is not considered a direct cost of sales.
Is bad debt expense an operating expense?Bad debt expenses are classified as operating costs, and you can usually find them on your business' income statement under selling, general & administrative costs (SG&A).
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