In a perfect world, you’d get paid as soon as you provide goods or services. But customers often pay on credit—which means you’ll have to wait to collect that money. And you may not always get every penny.  

That’s why calculating net credit sales is so important. 

The good news is doing this calculation is simple and it gives you the information you need to calculate other important accounting numbers as well, including your accounts receivable turnover ratio. This guide will teach you what net credit sales are, where it is on a balance sheet, and how to calculate it. 

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What Are Net Credit Sales?

Net credit sales refer to the sales you make that customers pay for later. Customers pay these totals with credit, meaning you still need to collect payment. 

For example, if you’re a freelance web designer, your customer might pay your final invoice with credit. That means it will take a few weeks for you to receive the money. 

How to Calculate Net Credit Sales

The net credit sales formula is simple: 

Net credit sales = All sales on credit  – Sales returns – Sales allowances 

Sales returns occur when your company gives customers a refund or credit after they purchase goods or services from you. This usually happens because of a problem with the product, such as issues with a shipment or service. 

Sales allowances are price reductions made for reasons besides a return. For example, you might accidentally overcharge a customer by forgetting to apply a discount. The correction would be represented by a sales allowance. 

Net Credit Sales Calculation Example

It’s easier to see how to find net credit sales by looking at a real-world example. 

Say that your business sells $10,000 worth of products on credit. One customer returns $600 worth of the items because of a problem with the products. The goods didn’t meet their expectations. You gave another customer a $100 credit because you failed to take their coupon into account originally. They paid an extra $100 and need that money back.

Your total sales on credit would be $10,000. However, you would have to subtract $600 for the returned goods. You’d also have to subtract another $100 because of the sales allowance for the credit that you didn’t apply properly.  So your net credit sales would be:

Net credit sales = $10,000 – $600 – $100

That means you’re waiting to collect $9,300 from customers. 

How to Find Net Credit Sales on a Balance Sheet

You probably collect credit payments from customers who will pay in a few weeks or months. Because of this, you list net credit sales on a balance sheet in the short-term assets section. Credit sales are part of your accounts receivable, along with other totals that customers owe.

You’ll also list net credit sales on your profit and loss statements as part of your total sales revenue. That’s because the money customers will eventually pay you after buying on credit is part of your company’s revenue.

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Advantages and Disadvantages of Net Credit Sales

Here are some of the biggest pros and cons of net credit sales. 

Advantages

• Provides Break-up. Net credit sales distinguishes between sales returns and sales allowances. This helps you better understand the amount of revenue you lose to returns because of problems with goods. 
• Monitor Receivables. Tracking net credit sales helps with managing receivables efficiently. Use the information to monitor how much you expect to collect from customers who paid on credit. 
• Analysis and Preservation of Ratios. Knowing net credit sales is important for calculating other accounting ratios.
• Facilitates the Creation of a Ledger. Creating an account in each customer’s name makes it easy for you to track how much each person owes. Your company can use this information to collect payments. You can quickly see which customers are overdue and initiate collections. The information also helps you identify customers who frequently return items or have transaction problems.   

Disadvantages

• Delay in Collection. It takes time to collect when you allow customers to buy on credit. If customers don’t pay fast enough or you provide too long for customers to pay, you could have liquidity issues. 
• Extra Expenses. When you forfeit revenue because of sales returns or sales allowances, this is money your company doesn’t have. You could potentially avoid these losses with proper due diligence. Better quality control and avoiding transaction problems allows you to keep more revenue. 
• Creation of Bad Debts. When customers don’t pay, your business gets stuck with bad debt. You can’t collect or may have to incur added expenses to collect. This could involve hiring outside collections agencies. 

3 Tips for Using Net Credit Sales to the Benefit of Your Business

Your business benefits in several ways from calculating net credit sales. 

• Find the Accounts Receivable Turnover Ratio. You calculate accounts receivable turnover ratio by dividing net credit sales by average accounts receivable. It shows how effective your business is at collecting money that customers owe. 
• Measure the Receivables Collection Efficiency. Receivables collection efficiency is calculated by dividing accounts receivable by net credit sales and multiplying that number by the number of days in the year. This shows your average collection period. A longer average collection period means your company isn’t efficient at converting sales on credit to cash in hand. 
• Analyze Your Company’s Selling Practices. Beyond determining if you’re efficient at collecting, net credit sales also help you understand selling practices. Reviewing the sales returns helps you to identify issues such as quality control issues. If you have a large volume of returns, this suggests a problem that could affect your company’s bottom line. If too many customers are dissatisfied with your product, you’ll need to make changes.

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Online Invoice Payment Processing Software | Web & Mobile

If you want to collect what customers owe, you should offer many options to make payments. This includes letting your clients pay with credit, debit, or flexible online payment options. 

You’ll also want to make it easy to pay. With Invoice Simple Payments, your clients can pay directly from their invoice link to simplify the process. 

Invoice Simple also allows you to track outstanding invoices, their due dates, and their balance due at a glance.