Gross and Net Sales
Many of the business performance standards are measured against a baseline. For the bulk of production and operation performance tools the baseline is net sales. The key to an accurate performance standard is having an exact sales figure. As an example, in a restaurant operation one of the prime costs is food. Thus, food consumption is measured as a percentage of net sales. Suppose the performance standard is 36.5% of net sales. During the week sales are $120,000 and cost of food is $43,800, then the performance standard has been met. But what is sales were actually $116,000 and food costs were still $43,800? The performance ratio is now 37.75%. Now the restaurant is way off the standard maximum allowed. This $4,000 difference between gross sales and net sales created a 3.45% (a 9% increase in food costs) difference in the prime food cost performance standard.
The key to proper performance evaluation is using the correct baseline which is most often net sales. As in the example above, $120,000 is gross sales and $116,000 is net sales. What exactly does this mean – gross and net?
The best way to explain the difference between the two is as follows:
Gross Sales – Sales the customer actually purchases at the register based on normal price structure.
Net Sales – The amount the customer actually pays for the product they keep.
In general there are two groups of value reductions to gross sales including incentives and adjustments to get to net sales. These are explained and illustrated in the relationship section below. In addition there are a couple of different reporting formats for the accountant to use including industry standards. Finally, some unique presentation formats for certain industries including franchise operations, construction and housing rental are illustrated.
Remember, the primary goal is to establish an accurate net value to measure productivity and operations.
Gross and Net Sales Relationship
In retail the single most common adjustment to sales are returns. Think of December 26th each year at every major retailer. To calculate the actual amount
© 2017 – 2022, David J Hoare MSA. All rights reserved.