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.

RELATED TERMS
  1. Net Profit Margin

    Net profit margin, or net margin, is equal to net income or profits ...
  2. Profit

    Profit is the financial benefit realized when the amount of revenue ...
  3. Net Profits Interest

    Net profits interest is an agreement that provides a payout of ...
  4. Short-Term Loss

    A short-term loss is any asset sold at a loss that's been held ...
  5. Operating Profit

    Operating profit is the profit from a firm's core business operations, ...
  6. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to ...
Related Articles
  1. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  2. Investing

    Understanding the Income Statement

    The best way to analyze a company - and figure out if it's worth investing in - is to know how to dissect its income statement. Here's how to do it.
  3. Investing

    Profitability Indicator Ratios

    Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.
  4. 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 ...
  5. Tech

    Using Tax-Loss Harvesting to Keep Your Gains

    Harvesting tax losses is a key skill that investors can use to keep more of their money in their pockets the next time they file taxes.
  6. 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.
  7. Investing

    The importance of knowing your net worth

    It is vital that you track your net worth (the difference between what you own and what you owe), no matter what your age.
  8. Investing

    Bank of America's 4 Most Profitable Lines of Business (BAC)

    Discover how each of Bank of America's primary lines of business impact the company's bottom line and learn about the factors that affect each one.
RELATED FAQS
  1. How do operating expenses affect profit?

    Explore how operating expenses and the cost of goods sold can either increase or decrease a company's profits on an income ... Read Answer >>
  2. 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 >>
  3. Is operating profit the same as net income?

    Understand the difference between operating profit and net income, including how each type relates to the other and how both ... Read Answer >>
  4. 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 >>
  5. How do operating income and net income differ?

    Operating income and net income both show the income earned by a company, but they are distinctly different ways of expressing ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center