21 May Net Credit Sales
What are Net Credit Sales?
Definition: Net credit sales refer to the sales that a company makes on credit terms of, say, 30, 60, or 90 days, or some other credit period. If any goods are returned by customers or if the company offers a discount, these amounts are reduced from the sales figure to arrive at the net credit sales figure.
What does Net Credit Sales mean?
Every business enterprise would like to sell goods or provide services after receiving payment in advance or receiving payment immediately after a sale has been made. However, that may not be possible for every sale.
Competitive pressures may force a company to offer its goods on credit where the buyer would be required to pay after 30 or 60 days or more. Additionally, many companies are able to increase their sales volumes by providing credit to their customers.
If a company is selling on credit, it becomes necessary to track net credit sales. Here is how the net credit sales figure is calculated:
Net credit sales = Total sales on credit – sales returns – discount provided to customers.
Sales returns refer to the value of the goods that the customer returns to the seller. The customer may return the goods if they are of inferior quality or if they do not match the promised specifications.
The net credit sales figure also needs to be reduced by the discount that is provided to the customer.
Why does a company need to calculate its net credit sales? If the proportion of net credit sales to total revenues is high, it could be indicative of an overgenerous credit policy. The net credit sales figure is also useful as it helps a firm to calculate “days sales outstanding” and “accounts receivable turnover,” two ratios that help a firm to manage its receivables.
Example of Net Credit Sales
Newport Engineering is a manufacturer of thermal sensors. In March 2017, the company had sales revenues of $120,000. Of this amount, sales valued at $100,000 were on credit. One customer returned goods worth $1,000. In addition to this, the company had to offer a discount of $500 to a customer who received a late delivery.
The net credit sales of Newport Engineering for the month of March 2017, can be calculated in the following manner:
Total credit sales – sales returns – discount
$100,000 – $1,000 – $500
Net credit sales = $98,500.
Keeping a watch on its net credit sales figure helps a company to monitor its receivables. If a firm’s credit sales increase and it offers its customers a lengthy credit period in an effort to boost sales, it could lead to liquidity problems for the company. Excessive credit can also result in a rise in bad debts.