Net loss is a situation where expenses exceed a company’s revenue. This, in a certain period of analysis, for example, a year, a quarter or a month.
That is, a net loss means that a business is generating more expenses than income.
The opposite of a loss is a gain or profit. To determine if a company has won or lost in a fiscal year or accounting period, we can look at the income statement. In it, the company’s income (which is added to the result) and expenses (which are subtracted from the final result) are recorded.
If the income statement has a negative balance, then we have a net loss for the year. We are considering all expenses. For example, those incurred to manufacture or develop the goods or services sold, such as the cost of raw materials.
Likewise, administrative expenses are considered, such as the management payroll, rents and water and electricity services that the firm had to pay to carry out its activity.
Other important expenses are sales, such as those paid for advertising or marketing, commercial agents, etc.
No less important are the financial expenses, that is, those that correspond to the payment of interest on loans received.
Causes of a net loss
The causes of a net loss can be several, for example:
- A situation of economic slowdown that has generated a drop in sales.
- The appearance of a new competitor that has also produced a reduction in sales.
- Management errors, for example, entering a business that ultimately turned out to be unprofitable.
- An increase in costs by suppliers.
What to do in case of a net loss?
It is important to note that, in a specific accounting year, a company may record a net accounting loss. But if it becomes something sustained over time, it would be difficult for the company to generate value (and that must be its objective, to create value for shareholders).
In that sense, what actions to take in the face of net losses? The first thing is to identify where the problem is. If the issue is, for example, that the firm is following, for example, a business model that, due to technological changes, is becoming obsolete, the company’s business model should be rethought towards one that is profitable.
Similarly, certain accounts that are generating many expenses could also be identified, for example, advertising expenses.
Then, after an evaluation of those advertising expenses, let’s imagine that you spend mainly on print ads, you can change your strategy to spend less in traditional media and opt more for online advertising.
Net Loss Example
Suppose we have the following income statement: