Just as the distinction between cash flow and profit can be murky, the terms “net sales” and “net income” are often falsely conflated. To create an accurate financial report for your business, you must understand the difference between net sales and net income to ensure proper accounting and avoid misrepresenting your company’s performance. Here, we’ll define these terms, show you how to calculate these figures, and discuss four key differences between the two metrics.
What are net sales?
Net sales represent a company’s total sales minus product returns, allowances, and discounts. An effective net sales calculator only needs to consider four business metrics:
- Gross revenue: the total amount your company has earned from sales.
- Product returns: the total amount your business repays to customers for returned products.
- Allowances: price reductions or rebates your business gives to customers so that they keep, rather than return, unwanted items.
- Discounts: incentives offered to clients who pay early.
Given this formula, it becomes clear that net sales and revenue, though closely related, are not the same term.
Additionally, when exploring the difference between net sales vs. gross sales, it becomes clear that these two terms are distinct as well: Gross sales describes the sum of all sales receipts, whereas net sales describe this number after expenses and cost of goods sold (COGS) are subtracted.
What is net income?
Net income is the same metric as profit. When distinguishing between net sales vs. net income, it may help to know that net sales is the starting point for net income calculations. To calculate net income, subtract expenses, and tax payments from your net sales. This loose formula reflects the more formal definition of profit: revenue minus costs (when trying to distinguish between net income vs. revenue, keep in mind that the latter is part of the former).
How is net sales calculated?
The formula to determine net sales is simple. Subtract product returns, allowances, and discounts from gross revenue to obtain net sales.
The formula looks like:
Net sales = gross revenue – (product returns + allowances + discounts)
How is net income calculated?
Whereas net sales can be simply described with a formula, net income involves the subtraction of so many costs that a formula may make net income tougher to understand. Instead, follow the below steps to calculate net income:
- Use the net sales formula to calculate net sales.
- Subtract the cost of goods sold.
- Subtract your operating expenses.
- Subtract your administrative expenses.
- Subtract any depreciation of goods.
- Subtract any interest levied on your business.
- Subtract any taxes your business must pay.
- Subtract any additional expenses not covered under these categories.
Four key differences between net sales and net income
Given the above definitions of net sales vs. net income, the following key differences are clear:
1. Net income is calculated by deducting all expenses from net sales
Calculating net sales demonstrates how much money your business is bringing in from sales, but the net sales figure doesn’t portray the additional business costs involved in your operations. Net income reflects the amount of money your company has left over after all your expenses – not just product returns, allowances, and discounts – are subtracted.
2. Net sales and net income appear on different lines of an income statement
Net sales on an income statement appear toward the top. An income statement may list net sales as the top line. If the first section of the income statement also includes gross sales and cost of sales, net sales may appear as the second or third line. Net income, on the other hand, is always the bottom line (this is why the term “bottom line” is often used to describe a business’s overall condition).
3. Net sales does not depend on net income, but the opposite is untrue
Net income is calculated using net sales. The net sales formula, on the other hand, is entirely independent of net income. Another way to look at this relationship is that net income is a subset of net sales, and net sales is a superset of net income.
4. Net sales is always greater than net income
By definition, net sales will always be greater than net income since costs are subtracted from net sales to determine net income. This relationship largely explains why net income is the bottom line on an income statement: The last metric listed should best reflect your business’s financial situation, and net income reflects all money moving in and out of your company after all sales.
What else is important to know about net sales and net income?
In addition to the distinction between net sales and net income, it can be useful to know about the difference between net income and operating cash flow (OCF). OCF, unlike net income, reflects how much capital your business generates through its daily operations. Net income is a subset of OCF just as net sales is a subset of income. The formula for OCF is:
OCF = Net income + Depreciation/Amortization + Changes in Working Capital
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