Net Billings

What are Net Billings?

Simple Definition:
Net billings represent the amount of money a company actually expects to receive after subtracting all deductions from gross billings. Think of it as the “real money” you’ll see in your bank account.

Real-World Example:
Let’s say you run an online course platform:

• You sell a course for $100 (gross billing)
• Offer a 10% student discount (-$10)
• Pay a 5% transaction fee (-$5)

Your net billing would be $85, which more accurately reflects what you’ll actually receive from the sale.

Why are Net Billings Important?

1. Accurate Financial Planning
   • Shows real expected income
   • Helps create realistic budgets
   • More accurate cash flow predictions
2. Better Decision Making
   • Reveals true business performance
   • Helps price products and services
   • Shows actual profit margins
3. Business Health Assessment
   • More accurate than gross billings for evaluating business health
   • Helps identify problematic areas (high discounts, fees, etc.)
   • Better indicator of sustainable growth
4. Stakeholder Communication
   • Used in financial reports
   • More relevant for investors
   • Better reflects business reality

How to Calculate Net Billings

The Basic Formula:
Net Billings = Gross Billings – All Deductions

Detailed Formula:
Net Billings = Gross Billings – Discounts – Returns – Refunds – Chargebacks – Payment Processing Fees – Partner Commissions – Other Deductions

Detailed Calculation Example

Let’s say you run a small e-commerce business:

• Total product sales (Gross Billings): $50,000
• Volume discounts: -$5,000
• Returns: -$2,000
• Payment processing fees (3%): -$1,500
• Marketplace commission (10%): -$5,000

Net Billings = $36,500

Common Deductions in Net Billing Calculations

1. Customer-Related Deductions

• Promotional discounts
• Loyalty program rewards
• Bulk purchase discounts
• Student/senior/military discounts

2. Transaction-Related Deductions

• Credit card processing fees
• Bank charges
• Currency exchange fees
• Payment platform fees

3. Partner-Related Deductions

• Affiliate commissions
• Reseller fees
• Referral payments
• Agency fees

4. Service-Related Deductions

• Refunds for service issues
• Quality guarantee adjustments
• Shipping compensations
• Service level agreement credits

Net Billings vs. Revenue: Understanding the Difference

While net billings and revenue are closely related, they’re not always the same:

Net Billings

• Focuses on billable amounts after deductions
• Based on billing period
• Includes amounts not yet collected

Revenue

• Recognized when earned (accounting principle)
• May spread over multiple periods
• Only includes delivered goods/services

Example:
You sell a 12-month subscription for $1,200:

• Net Billing: $1,200 (after deductions)
• Revenue: $100 per month for 12 months

Tips for Managing Net Billings

1. Track All Deductions Carefully
   Use detailed categorization. Monitor trends in deductions. Look for opportunities to reduce deductions.
2. Analyze Deduction Patterns
   Which products have the highest returns? Which discounts are most effective? Where can processes be improved?
3. Use Technology Effectively
   Implement good accounting software. Automate deduction calculations. Generate regular reports.
4. Optimize Your Net Billings
   Review and negotiate processing fees. Analyze discount effectiveness. Improve product quality to reduce returns.

Remember: While gross billings might look impressive, net billings tell you what your business is actually earning. Focus on optimizing your net billings for sustainable business growth.