What is a 'Net Loss'

A net loss, sometimes referred to as a net operating loss (NOL), 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 will not survive in the long-term.

BREAKING DOWN 'Net Loss'

A net loss appears on the company's bottom line. Net profit or net loss is calculated using the following formula:

Revenues - Expenses = 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 2017 may not be paid until January 2018. Because these payroll wages go with revenues earned in December 2017, the expenses are matched with revenues from 2017 and recorded on the profit and loss statement for 2017, lowering the company’s net loss for that year.

Factors Contributing to a Net Loss

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 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 2017, a state's government official 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, state officials cut current and upcoming fiscal year revenue projections by $333 million. Legislators plan to revise recently approved budget bills as well.

RELATED TERMS
  1. Operating Loss - OL

    Operating expenses of a company in excess of gross profit is ...
  2. Net Profit Margin

    Net profit margin, or net margin, is equal to net income or profits ...
  3. Gross Margin

    A company's total sales revenue minus its cost of goods sold, ...
  4. IRS Publication 536

    IRS Publication 526 offers guidance to taxpayers who have more ...
  5. Capital Loss

    A capital loss is the loss incurred when a capital asset that ...
  6. Losses and Loss-Adjustment Expense

    Losses and loss-adjustment expense is the portion of an insurance ...
Related Articles
  1. Investing

    3 Profit Metrics Every Investors Should Understand

    In this article, you will understand how the three metrics gross profit, operating profit, and net profit helps investors see how a company is performing.
  2. Investing

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
  3. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  4. Taxes

    How to deduct stock losses from your tax bill

    Learn the proper procedure for deducting investment losses and get some tips on how to strategically structure them to lower your income tax bill.
  5. Investing

    Square's Q4 Loss Was Much Narrower Than Expected

    Square (NYSE: SQ) saw its stock close 14% higher on the day the mobile payment and financial services specialist released its fourth-quarter and full 2016 results.  For the quarter, Square's ...
  6. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  7. Financial Advisor

    How to Help Clients Harvest Tax Losses by Year End

    Here's how to help clients employ tax-loss harvesting to reduce their taxes before year end.
  8. Investing

    What is Net Worth?

    Net worth is the amount by which assets exceed liabilities. Another way to say this is, it's the value of everything you own, minus all your debts.
RELATED FAQS
  1. How does gross margin and net margin differ?

    Gross margin or gross profit margin and net profit margin are both profitability ratios used in determining the financial ... Read Answer >>
  2. Gross Profit, Operating Profit and Net Income

    Find out how to calculate gross profit, operating profit, and net income. Learn about the relationships between theses types ... Read Answer >>
  3. What is the difference between revenue and profit?

    Revenue is the total amount of income generated by a company. Profit is the bottom line or net income after accounting for ... Read Answer >>
  4. What is the formula for calculating profit margins?

    Learn about gross, operating and net profit margins, how each is calculated and how they are used by businesses and investors ... Read Answer >>
Trading Center