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What is Net Loss?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 November 2016
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A net loss is the result of a financial operation that fails to generate enough revenue to cover all expenses associated with the operation. In a business setting, the net loss represents the negative amount that is realized when sales of finished goods fail to cover the expenses associated with producing the goods. It is also possible for investors to realize net losses on one or more investments over the course of time.

For the purposes of accounting, the net loss makes it possible to document the exact status of any type of financial enterprise, both in a business and in a home budget. Any home that has more total expenditures than total income for the household is said to be operating at a net loss. As with a business situation, a financial accountant that notices a continual trend of a net loss will often urge that expenses be cut in order to either minimize or eliminate the amount of the capital loss.

In terms of investing, a net loss can take place when an investment drops below the original purchase price. When shares of stock lose value for any reason, this causes the unit price for each share to decrease. Should the drop in the worth of each share slip below the price per share that the investor originally paid for the shares, the investment is considered to be of negative worth and therefore a net loss.

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A net loss is often a warning that current financial practices should be re-examined and possibly altered in order to comply with current circumstances. Choosing to take action to minimize the amount of net loss sooner rather than later can often mean the difference between weathering a temporary financial setback versus experiencing bankruptcy or a failure of the business. For this reason, financial accountants often take steps to apprise their clients of the presence of a net loss as soon as the situation is first determined.

While it is not unusual for businesses and other organizations to operate at a net loss for short periods of time, few organizations are prepared to function at a continual loss over an extended period. Often, companies create resources that are held in check to assist the business to cover operating expenses during those periods when the sales do not exceed expenses. However, once those resources are exhausted, the company must either find some other means of temporary financing or take other measures to restore profitability.

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emtbasic
Post 6

Some businesses use accounting tricks to run at a net loss even when they are making money. Sometimes they are using shady techniques, sometimes this is even legal if it is a business with a lot of operating expenses, depreciation, etc.

This is pretty common with some types of property businesses, since you can depreciate a property over a period of time. A rental house, for example, will have depreciation, utilities, maintenance, repairs, insurance, property taxes, etc. This can take the "paper profit" down to a loss with a good accountant.

A lot of cash businesses do this too, like bars and car washes, but I would guess a lot of them are shady.

winslo2004
Post 5

@amsden2000 - You obviously knew something that a whole lot of people who start businesses do not know, or choose to ignore. It's a tough thing to tell someone who is working 100 hours a week at a new business that they are going to have to figure out some other way to eat for a couple of years while it gets off the ground.

I once studied Kung Fu at a school that was very successful, but like all new businesses had a rough patch at the beginning. The teacher was married and his wife was a waitress. They had it figured out that with her pay, they could just make their bills until the school started to bank.

One day when she should have been at work, she walked in the office at the school all smiles. Her husband asked her why she was there and she said, "I'm so excited about this I quit my job and I'm here to work for you. What do you want me to do?" He told her "Go and ask for your job back so we can eat".

They aren't married anymore.

Anyway, congratulations on your business doing well. I admire someone who can save up that kind of money.

horsebite
Post 4

@Snoopie - That is true, but only for so many years. It's still better to have a profit than a loss.

You always hear people on TV and in the movies say that somebody made their business lose money on purpose so they would have a tax write off. That does not make any sense. If it had made a profit, even after taxes you would still have more money. That is a pet peeve of mine.

Jacques6
Post 3

@amsden2000 - It also pays to keep an eye on competitors and what they sell! I own a small business myself and I am always on the look out for how my competitors are doing their business. I had a run in with net profit loss for a year -- until I rearranged my store. I never took any college class or seminars on business and I made a rookie mistake.

My store was arranged logically (or so I thought) so that shoppers could find what they were looking for easily and get out. When I rearranged, all I did was move the snack and small miscellaneous to the front by the registers. When people are on their way out, they snag little things they might need.

Suddenly, my business clears the net profit loss it was sinking into and I'm out of the red. I think I'll take a business class just so I don't make any more rookie mistakes.

amsden2000
Post 2

I studied business in a college class before I started my coffee shop. Even for a small business like mine, it is vital to keep an eye on where every single penny is going -- especially in the first three years of operation.

According to my class, most businesses take three years to clear being in the red and get up to speed. My coffee shop was in the red the first two years -- but I had estimated it to in the red, so I had stashed enough of a budget to wait it out. After the two estimated years of being in the red, my little coffee business took off and I have no net loss as of yet.

Just budget carefully and keep an eye on your business income and loss. I usually can see profit loss on the horizon before it hits.

Snoopie
Post 1

A net operating loss occurs when a business has more allowable tax deductions than it has taxable income. That means the business has negative income.

The IRS allows taxpayers and businesses to use a net operating loss in one year to offset losses in other years. The losses can be carried back to previous years or carried forward to offset future profits.

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