Net Sales can only be improved by selling more, raising selling prices, or reducing discounts and bad debt write-offs. Every dollar of Gross Sales that makes it to Net Sales has the potential to be a full dollar that you can use to pay expenses, with what’s left after paying ALL expenses being your Net Income.
Overview
After you deduct sales discounts, returned merchandise credits, and write-offs for a bad debt from Gross Sales, you are left with Net Sales. These Gross Sales reductions should not be buried way down in your expense accounts. Accounting for these negative sales impacts outside of Gross Sales overstates what cash you brought into your business from your marketing and sales efforts.
Your Net Sales represent the total amount of money collected for goods or services sold before any expenses are subtracted during that accounting period. It best reflects how well you are utilizing your capital, capacity, and other resources to generate the top line of your business, which funds everything else in your business.
Accrued Net Sales do not represent cash flow, nor do cash sales represent profit. Net Sales only represent what your sales transactions reflect, in total, for that period, as the cash you should collect from completed sales transactions.
The first question involving Net Sales is whether there is a significant difference between your Gross Sales and your Net Sales. If yes, what needs to be done differently today to hold onto more of your Gross Sales? Once you know that answer, the next question is determining who is accountable for making these improvements.