Gross sales is a junk measurement

Excuse my topic title; it’s just a way to troll the traditionalists.

But it’s true. Gross sales is nothing but churn. You need to sell your organization on estimated net profits as a primary measurement of performance.

This protects you against nasty surprises at year-end when you calculate your costs against profits. If you have variable costs and multiple models within the same type of sector, then you may be replacing lower-cost sales with higher-cost sales. How would you know until it’s late in the game if you don’t create a regularly update estimated net profit model?

Got a brand new product with tiny margins? Don’t let those record sales give you a deceiving feeling of self confidence. And don’t let your staff artificially inflate their numbers, patting themselves on the back over high churn.

It’s a simple calculation too.

1. First take your gross sales, per product
2. Then, subtract your estimated fixed and shared costs (ie. what you pay for, regardless of sales volume). Assuming no products are irregular, this could be warehousing costs, shipping costs, general consulting, administrative salaries, etc. If those costs are general to the business, rather than the product, even those costs out across all product lines.
3. Then also subtract your variable costs (ie. the things that are directly tied to the sales of your product, like the cost to produce THAT product, special marketing for the item, staff that service only that item, etc.)
4. Gross sales less fixed/shared costs, less variable costs, equals estimated net profit.

You’re probably not going to capture interest revenue, debt payments, etc., but this is an exercise to control for different type of revenue streams, not financial reporting.

That’s also not to say that you shouldn’t have products with different margins. It’s simply that, when you have products at drastically different margins, gross sales becomes less and less meaningful.