Net sales and the cost of goods sold (COGS) are two figures found in every income statement.
But why do sales leaders consider it as important?
Net sales and cost of goods are prime indicators of profitability and efficiency of the company.
Every sales leader must know how much money the business generates, the cost of making products and the profit made. But before that, they need to know how to make sense of large volumes of data. One of the biggest challenges facing sales leaders is to make sense of chock-a-block data, interpret it in different ways, and derive insights to improve efficiencies. The first step towards this is to use CRM analytics that can help derive this data in a meaningful way.
In this page, we will take you through sales metrics that matter, and how to derive them easily. We'll also be covering:
Simply put, Net Sales represents a company’s total sales (also called gross sales) less returns, allowances, and discounts.
Net sales, by definition, offers a more accurate picture of true sales than gross sales—because gross sales includes things like returns, allowances, and discounts, which can present a misleading picture of the revenue your business is bringing in.
“We keep track of Net Sales because we are aware of the fact that inadequate tracking of Net Sales can lead to a possible overpayment on taxes, over-inflated revenue totals, and inaccurate financial statements,” Daniel Foley, founder and CEO at Daniel Foley SEO, told us.
“Net Sales are the most accurate reflection of our company’s effectiveness,” Matt Bertram, CEO and SEO Strategist at EWR Digital, said. “By including the relevant deductions in the calculation, the Net Sales figure reflects the efficiency of whatever sales strategy we are following.”
As we mentioned above, Net Sales is essentially an adjustment to Gross Sales that takes potential revenue-inflating factors out of the equation. As such, in order to calculate Net Sales, you’ll need four key pieces of information included in the Net Sales formula:
Also referred to as Net Revenue, Net Sales is found in the Revenue portion of the Income Statement. Net Sales lives in the top section of the Income Statement—a metric that takes some adjustments into account, but not all. Most notably, expenses are not taken out in the Net Sales calculation.
A top-line metric, Gross Sales represents the total sales made in a given period. Or, as Accounting Tools puts it, “Gross sales is the grand total of all sale transactions reported in a period, without any deductions included within the figure.”
Those adjustments make up the primary difference between Gross Sales and Net Sales.
Net Income is a more drilled-down calculation of how much a company earns. Also called Net Earnings, the formula for Net Income involves starting with Net Sales and subtracting expenses including:
Cost of Goods Sold (COGS)
General, administrative, and other expenses
Those adjustments make up the difference between Net Sales and Net Income.
Both these numbers appear in your income statement. Net sales and operating income are different terms. Net sales refers to the income you make from selling goods or services for a specific period of time. Operating income is the amount left after you reduce expenses from net sales.
Net Sales is a vital component of understanding your business’ financial performance and realities.
“Tracking Net Sales helps us to address the underlying reason for sales adjustments,” said Daniel Foley, founder and CEO at Daniel Foley SEO.
“For example, if my sales allowances are huge, I need to address product defects and maybe search for a new supplier. If the return of my products are high, I can investigate the reason behind the many customers returning my product.”
“I use our Net Sales to help my managers and team to evaluate how well we are selling our services,” Matt Bertram, CEO & SEO Strategist at EWR Digital, added.
As we mentioned above, Net Sales is what remains after all returns, allowances, and sales discounts have been subtracted from gross sales. Now, let’s talk about how to use those pieces of financial information to calculate Net Sales.
Here’s the sales formula for calculating Net Sales:
Net Sales = Gross Sales – (Returns + Allowances + Discounts)
So, for example, if a company has the following finances:
Gross Sales: $100,000
Their Net Sales equation looks like this:
Here’s another example: A mid-sized software company wants to calculate their Net Sales for the prior quarter to see how a discount they ran affected their sales. Their numbers are as follows:
Cost of Sales refers to the various costs and expenses a business incurs during the production and sale of their product or service. Those costs can include labor, materials, and overhead. For an ecommerce company, for example:
Labor: Salary and benefits paid to warehouse staff
Materials: Purchasing or manufacturing inventory
As Avinash Chandra, founder and CEO at BrandLoom explains it, “The cost of sales is basically the total cost that is utilized to craft a product or service. It is one of the best sales metrics to analyse your profit and loss. It helps you strategize your business activities in a cost-effective way.”
The bottom line is Cost of Sales calculations primarily measure efficiency. What does it cost you to produce the sales and revenue you produce?
Cost of Sales is often confused with Cost of Goods Sold (or COGS)—and for good reason. The two metrics measure the same thing, but they’re used by different types of companies.
Retailers, for example, typically used sales formula like Cost of Sales, while manufacturers are more apt to use Cost of Goods Sold. Service-based businesses like accountants and lawyers are also likely to use Cost of Sales. Businesses that offer both physical products and services may even include both metrics in their financial statements.
Whereas Net Sales can tell you how much your business is really bringing in, Cost of Sales tells you how much that revenue costs you—and it’s a vital part of calculating bottom-line sales metrics like Net Income and operating margin.
“[Cost of sales is] vital in helping the business to make important decisions about improving sales—to generate more revenues for the company and reduce the cost of producing goods and services, so that the net revenue or profit improves,” Alex Berman, founder at Email10k, said.
Cost of Sales represents a measurement of the cost efficiency of your business. By calculating it regularly, you can identify inefficiencies in your operations and opportunities to reduce costs and improve operating margins.
According to Chron, here’s what you’ll need to know in order to calculate your Cost of Sales. The cost of:
The direct and indirect materials you use to manufacture your products or services
Direct and indirect labor used to manufacture the product or service
The total cost of your production facilities
Here’s the formula for calculating Cost of Sales:
Cost of Sales = Beginning Inventory + Purchases During the Period – Ending Inventory
So, for example, if an ecommerce company has the following finances:
Tracking net sales might be easy, but tracking metrics that affected it, factors that caused a surge or drop in sales, can only be possible if you track metrics on a regular basis.
The right CRM helps you track metrics, and presents data in a visual and easy-to-decipher format, and propels you to make decisions quickly. Freshsales (formerly Freshworks CRM), powered by Freddy AI, delivers a layer of advanced AI capabilities on top of sales and marketing workflows.
This empowers you to take actions based on insights delivered. Pull out revenue metrics from your sales CRM by source, salesperson, territory, and more, with revenue analytics. Pinpoint the campaigns that impacted metrics such as net sales and cost of sales.
With advanced reports and dashboards spanning both sales and marketing activities, teams can get actionable insights and make meaningful decisions with the help of CRM for analytics.
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