Hey there finance friends! As a small business accountant, I often get asked about the difference between net income and net sales. I know it can get confusing trying to distinguish between these two critical metrics on your books.
But truly understanding the distinction is crucial for getting an accurate picture of your company’s financial performance.
So in this post, I’ll break down exactly what sets net income and net sales apart. My goal is to make the definitions crystal clear so you can confidently track both in your financial reporting. Let’s do this!
Net Sales: The Top Line Revenue
First what are net sales exactly?
Net sales represent the total revenue your business earns from selling products or services. This top line number reflects the amount of money coming into your company from sales alone.
To calculate net sales, you take your gross revenue and subtract any returns, discounts, and allowances. So the formula is:
Net Sales = Gross Revenue – Returns – Discounts – Allowances
For example, if your gross revenue is $1 million but you had $50,000 in returns and $30,000 in discounts, your net sales would be $920,000.
Net sales show the income your business makes before any expenses are accounted for. It’s a critical metric that forms the foundation for all your other profit calculations.
Net Income: The Bottom Line Profit
Now, what is net income?
Net income tells you your business’s final profits after subtracting all expenses. It encompasses both your operating expenses needed to run your business as well as additional costs like interest, taxes, and depreciation.
So while net sales reflect just profits from sales, net income shows profits after everything is said and done. This final profit number is why net income is often referred to as the “bottom line.”
To find net income, you:
- Start with your net sales
- Subtract cost of goods sold
- Subtract operating expenses like rent, payroll, utilities
- Subtract depreciation
- Subtract interest and taxes
For example, if your net sales were $920,000 but you had $500,000 in expenses, your net income would be $420,000.
Key Differences Between Net Sales and Net Income
Now that we’ve defined both terms, what sets net sales and net income apart? Here are the key differences:
1. Net Sales Comes First
Net sales is calculated before any expenses are deducted. It’s the very first line in your income statement. Net income comes after all expenses are subtracted from net sales.
2. Net Sales Doesn’t Depend on Net Income
The net sales formula doesn’t care what your eventual net income is. But net income does depend on starting with your net sales number.
3. Net Sales Is Always Bigger
By definition, net sales will always be a larger number than net income because expenses eat into profits.
4. Net Income Reflects Total Profitability
While net sales shows profit from operations, net income portrays total profitability after every cost is covered. Net income provides the complete financial picture.
5. Net Income Is “The Bottom Line”
Net income appears on the last line of the income statement, encapsulating the entire statement. Thus, net income is referred to as the bottom line.
Why Track Both Net Sales and Net Income?
So if net income shows your full profitability, why track net sales too?
While net income is the big picture number, tracking net sales is crucial because it shows the health of your core operations. Are sales growing or declining? How do discounts and returns fluctuate?
Watching trends in net sales gives insight into customer demand and pricing. It helps you spot opportunities to boost revenue.
So together, net sales and net income give you a full view of your financial standing. You need both to make informed business decisions!
Let’s Sum Up Key Takeaways
We’ve covered a lot here! To recap:
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Net sales is total revenue from sales only.
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Net income is total profit after all expenses.
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Net sales comes first and sets the foundation.
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Net income depends on net sales.
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Net sales is always bigger.
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Net income shows complete profitability.
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Net income is the “bottom line.”
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Track both metrics for a complete financial view!
Here’s to keeping your books straight! Go out there and maximize both your net sales and net income.
What Is Net Sales?
Net sales is the sum of a companys gross sales minus its returns, allowances, and discounts. Net sales calculations are not always transparent externally. They can often be factored into the reporting of top line revenues reported on the income statement.
- Net sales is the result of gross sales minus returns, allowances, and discounts.
- If net sales are externally reported they will be notated in the direct costs portion of the income statement.
- Changes in net sales will effect a company’s gross profit and gross profit margin but net sales do not include costs of goods sold.
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Understanding Net Sales
The income statement is the financial report that is primarily used when analyzing a company’s revenues, revenue growth, and operational expenses. The income statement is broken out into three parts which support analysis of direct costs, indirect costs, and capital costs. The direct costs portion of the income statement is where net sales can be found.
Companies may not provide a lot of external transparency in the area of net sales. Net sales may also not apply to every company and industry because of the distinct components of its calculation. Net sales is the result of gross revenue minus applicable sales returns, allowances, and discounts. Costs associated with net sales will affect a company’s gross profit and gross profit margin but net sales does not include cost of goods sold which is usually a 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. Companies may report gross sales, then net sales, and cost of sales in the direct costs portion of the income statement or they may just report net sales on the top line and then move on to costs of goods sold. Companies that sell goods and services on credit might also include the net credit purchases—also called total net payables—in this section of their financial statements.
Net sales do not account for cost of goods sold, general expenses, and administrative expenses which are analyzed with different effects on income statement margins.
Differences between Net Sales and Net Income.
What is the difference between net income and net sales?
If expenses eat up most of your sales revenue – or worse, more than your sales revenue – your net sales may not give you a sustainable net income. Knowing the difference between net income and net sales helps you understnd your finances clearly. Net sales is your total sales revenue less returns, allowances and discounts.
What are net sales?
Net sales are the total sales revenue of a company made over a specific period of time (month, quarter, or year) after deducting sales allowances, discounts, returns, and taxes. As opposed to gross sales, which don’t include any deductions, net sales are the filtered version of a company’s income.
Does money from other sources get counted in net sales?
Money from such sources does not get counted in net sales. It appears elsewhere on the income statement. When people speak of the bottom line in business, they’re talking about net income. Net income is simply profit, and the whole income statement flows toward this number.
What does net income mean on an income statement?
You may also see “net revenue” or “net sales” on the income statement. If so, this is the money you make from the goods or services your company provides to its customers, minus any returns or other allowances. Net income shows how well a company is turning sales into profits.
