What is a 'Net Loss'
Net loss, also referred to as a net operating loss (NOL), is the result that occurs when expenses exceed the income or total revenue produced for a given period of time. Businesses that have a net loss don't necessarily go bankrupt because they may opt to use their retained earnings or loans in order to stay afloat. This strategy, however, is only short-term, as a company without profits cannot continue surviving for a long period of time.
BREAKING DOWN 'Net Loss'A net profit or net loss determines a company’s bottom line. Net profit or net loss is calculated using the following formula: revenues – expenses – current debt = net profit or net loss.
Because revenues and expenses are matched during a set time period, net loss is an example of the matching principle. Expenses related to income earned during a set time are included in that period regardless of when the expenses are paid. For example, employees working in December 2015 may not be paid until January 2016. Because these payroll wages go with revenues earned in December 2015, the expenses are matched with revenues from 2015, are recorded on the profit and loss statement for 2015 and lower the company’s net loss for that year.
Factors Contributing to Net Losses
Low revenues contribute to net losses. Strong competition, unsuccessful marketing programs, weak pricing strategies, not keeping up with market demands and inefficient marketing staff contribute to decreasing revenues. Decreased revenues result in decreased profits. When profits fall below the level of expenses and cost of goods sold (COGS) in a given time period, a net loss results.
COGS also affects net losses. Substantial production or purchase costs of products being sold is subtracted from sales revenue. The remaining money is used for covering expenses and creating profit. When COGS exceeds funding for expenses, a net loss occurs.
Expenses contribute to net losses as well. Even when targeted revenue is earned and COGS remains within limits, unexpected expenses and overspending in budgeted areas may exceed gross profits. For example, Company A has $200,000 in sales, $140,000 COGS and $80,000 in expenses. Subtracting $140,000 COGS from $200,000 in sales results in $60,000 in gross profit. However, because expenses exceed gross profit, a $20,000 net loss results.
Example of a Net Loss
In May 2016, Michigan government officials anticipated a net loss of $99 million in revenue from the state’s principal business taxes. Substantial refunds were expected as companies took advantage of outstanding tax credits previously issued as a way of retaining jobs in the state during the recession. As a result, Michigan officials cut current and upcoming fiscal year revenue projections by $333 million. Legislators plan to revise recently approved budget bills as well.