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What is an Operating Loss?

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  • Written By: Felicia Dye
  • Edited By: Melissa Wiley
  • Last Modified Date: 06 November 2016
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When the costs of a company engaging in its business exceed the revenue that it generates, there is an operating loss. A simplified way of determining if there is an operating loss is to calculate a business' expenses for a given period and to subtract that amount from the total amount that was earned by the company during the same period. If the resulting number is negative, the company has experienced an operating loss. Although such a situation is not sustainable, it does not always mean immediate doom for a company.

The purpose of doing business is generally to acquire profits. To achieve this goal, a company must be able to cover the costs of doing business, such as paying for raw materials, distribution, and labor. Once all expenses are paid, if there is still money left over, these are the profits. In some cases, however, a business cannot adequately cover its expenses, which means that the costs of operating the company exceed the amount of money that was earned. This situation is referred to as an operating loss.

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It may seem impossible for a company to remain in business if it experiences an operating loss. There are several reasons why this is often possible. To begin with, credit can be used to offset a business' deficit. A business may not have the cash to pay its bills, so it may place the expenses on credit cards just as individuals do. In many cases, businesses are also allowed to accrue debt that does not need to be immediately repaid.

Another reason that operating loss does not necessarily mean immediate doom is because accounting is usually done for specific periods. For example, a company may review its finances on a quarterly or biannual basis. Within a given quarter, the company may have experienced an operating loss, but the company may have been operating profitably for 10 years. This means that, although there was a loss during a given period, the company should still have adequate financial resources.

In some instances, an operating loss may be beneficial. If a company has earned substantial profits throughout most of a year, a quarter of loss may help to offset some of its tax liability. Over the long term, however, this type of loss cannot continue. At some point, if a company does not profit or at least break even, it will not be able to sustain its operations.

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serenesurface
Post 3

An operating loss cannot be so bad. I hear in the news about how some of the major companies in the world are suffering from operating losses. But they still seem to do fine afterward.

It might be because they already have so much assets stocked up over the years. Or it might be that the operating loss is also an opportunity to rethink about how that business should be run. I think these companies who survive operating losses do because they make decisions to restructure their business or even merge with other small businesses to improve profits.

By the way, is there such a thing as an operating loss insurance? I've never heard of it and I don't really know how it would work but just wondering. Perhaps, it would help out small businesses who don't have assets like the big ones.

turquoise
Post 2

One of the worst things for a business is casualty or theft losses. These are also included in operating losses so even if the business is doing well and the profit is greater than the costs of operation, these extra costs can tip the balance.

But there is a great way to prevent this. You can actually show that operating loss for a previous year or for the next year. So if you had an unexpected casualty cost this year which puts you at an operating loss,but the previous year your profit was much larger, you can apply that loss for the previous year. So this way, you don't really appear to be at an operating loss.

My

uncle had to do this a couple of times and I think its great to have that option. Because in reality, the business is really doing well and there wouldn't have been an operating loss if it weren't for that extra cost.
candyquilt
Post 1

I heard it's quite common for businesses to have operating loss in the beginning of its life. I think as the business activity becomes more efficient and as investors increase and previous debts are paid, it will probably start making a profit.

It's probably a thin line though. If it doesn't fix things quickly, I think that bankruptcy will take place. I also wouldn't expect there to be investment in a business that is not profiting. So the business will have to find a less costly way to operate or will just go out of business.

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