Definition: Gross sales, also called top line sales, are the total of all product and service sales reported by an organization during a period not including any returns, discounts, or rebates.
What Does Gross Sales Mean?
What is the definition of gross sales? The gross sales are simply the total amount of sales made during a period. It’s how much product was moved off the shelves and sold to customers. This figure does not take into consideration any adjustments to the sales numbers. It’s simply a total figure. While the applicability of the total sales to a company’s true success is somewhat debatable, it’s a popular measure used in retail businesses to compare overall organizational size and annual growth. A slightly more meaningful measurement net sales because it accounts for adjustments like returns.
What is the difference between gross sales and net sales? Net sales are calculated by deducting returns, credits, discounts, and rebates from gross sales. This is an important distinction because the total figure doesn’t matter if there is a large return rate. For example, if a company has total sales of $1M and a 50% return rate, they really didn’t actually make $1M of sales. They sold $1M worth of product and $500,000 got refunded. Thus, they only sold $500,000 of product at the end of the day. This distinction is particularly important in industries with high return rates or discounts like retail apparel. That is why total sales tells more about a company’s size than it does its profitability.
Let’s take a look at an example.
Let’s take a simple example of two different companies that operate within the retail electronic industry. They sell similar products, but one company sells a cheaper variety of electronics, while the other company sells more expensive electronics. When reviewing the financial statements, you see the following data for the gross and net sales for each of the two companies:
|Cheap Company||Expensive Company|
|Gross Product Sales||$10,000,000||$8,000,000|
|Sales Returns||– $2,500,000||– $400,000|
As you can see, the cheap company appears to be a slightly larger company, from a total sales perspective, selling $2,000,000 worth of product more than the expensive company. While this is a positive factor, it appears the cheap company also receives a large amount of product returns, most likely fueled by the lack of quality associated with cheaper products. In comparison, the expensive company (the smaller company based on total sales), is able to limit the amount of product returns with a higher quality, more expensive product line. This generates a stronger net sales figure, and tends to produce a stronger profit margin that can be leveraged by the expensive company to fund operations.
Define Gross Sales: the total sales of an organization, unaffected by sales returns or discounts.