What Is Net Loss?
A net loss is when expenses exceed the income or total revenue produced for a given period of time. It is sometimes called a net operating loss (NOL). Businesses that have a net loss don't necessarily go bankrupt because they may opt to use their retained earnings or loans to stay afloat.
This strategy, however, is only short-term, as a company without profits will not survive in the long-term.
When profits fall below the level of expenses and cost of goods sold (COGS) in a given time, a net loss results.
Understanding Net Loss
A net loss appears on the company's bottom line or income statement. 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, a net loss is an example of the matching principle, which is an integral part of the accrual accounting method. Expenses related to income earned during a set time are included in (or "matched to") that period regardless of when the expenses are paid.
For example, employees working in December 2019 may not be paid until January 2020. Because these payroll wages go with revenues earned in December 2019, the expenses are matched with revenues from 2019 and recorded on the profit and loss statement for 2019, 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, a net loss results.
COGS also affects net losses. Substantial production or purchase costs of products being sold are 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 in 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.
- Net loss, sometimes called a net operating loss (NOL), is when expenses exceed the income or total revenue produced for a given time period.
- Companies must report their net profits or net losses on their income statements.
- Many factors can contribute to a net loss including low revenues, strong competition, unsuccessful marketing campaigns, and increased cost of goods sold (COGS).
Examples 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 the current and upcoming fiscal year revenue projections by $333 million.
Excessive carrying costs are a type of expense that can contribute to net losses. These are the costs a company pays for holding inventory in stock before it is sold to customers. For example, a company that sells frozen foods needs to pay for refrigerated storage facilities, utility costs, taxes, employee expenses, and insurance. If sales are slow, the company will need to hold onto its inventory for a longer time, incurring additional carrying costs which could contribute to a net loss.