Net purchases are total sales minus discounts, returns, and rebates, reported at the top of the income statement. Low net purchases may indicate significant discounts or slow economic periods, while high returns may suggest falsely increased sales. Companies track net purchases to ensure they don’t significantly hurt overall sales and profits.
Net purchases represent total sales minus discounts, returns, and rebates. Companies report this number at the top of the income statement for each accounting period. Purchase discounts include any amounts taken off the original purchase price of a good, such as 10% off large orders. Returns can be any items that a buyer sends back to the company due to overorders or allowable returns of dated merchandise. Allowances include any one-time special offers for broken items or incorrectly shipped merchandise.
Companies separate financial information from sales in this way so that internal and external stakeholders have a better understanding of sales revenue. Net purchases numbers also provide insight into whether a company is falsely increasing sales. For example, a company might ship several large orders to buyers. A portion of these orders may come back when buyers recognize mistakes. Comparing total sales against high returns should allow stakeholders the opportunity to discover these errors.
When a business has low net purchases, it may indicate that it is offering significant discounts for moving goods. This is often during slow economic periods when shoppers settle for fewer purchases. Discounts are also more frequent at specific times of the year. For example, around or after the holidays and the end of weather seasons are popular times for discounts. Companies can move goods quickly with higher discounts in order to avoid product obsolescence.
Another reason for higher discounts and low net purchases includes small discounts that induce shoppers to pay bills quickly. An example is payment terms like “1/10 net 30”. In this scenario, buyers receive a 1% discount if they pay the invoice within 10 days of receipt. Otherwise, the complete invoice is due 30 days after receipt. The discount goes against total purchases and results in lower net purchases as the discount increases.
Sales subsidies can negatively impact companies and should be infrequent. Yet when they do happen, companies are more often to blame. If a company sends goods improperly, it must replace them. Product damaged during transportation, refundable by shippers, will be compensated by company payments.
Most companies will track their net purchases. This allows the company’s management team to ensure that discounts, returns or allowances do not significantly hurt overall sales. Businesses generally expect higher discounts in the previously mentioned periods; Abundant discounts or returns in other periods may need further review. As discounts and returns will reduce sales, profits will also decrease. Lower profits can result in less money reinvested in the business and less operational improvements.
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