Net Loss

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Net Loss: Definition, Formula, and Examples

Key takeaways
* A net loss occurs when total expenses exceed total revenues for a reporting period.
* It is reported on the income statement as a negative net profit (sometimes called a net operating loss, or NOL).
* Causes include low revenue, high cost of goods sold (COGS), rising expenses, and one-time charges.
* Some tax systems allow certain net losses to be carried forward to offset future taxable income.

What is a net loss?

A net loss happens when a business’s expenses and COGS for a period exceed its revenues. It reflects the bottom-line result on the income statement and is the opposite of net profit.

Formula:
Net Loss (or Net Profit) = Revenues − Expenses

Under accrual accounting, revenues and expenses are matched to the period in which they are earned or incurred, so a net loss represents the matched results for that period.

A company reporting a net loss is not necessarily bankrupt immediately. Firms can use retained earnings, borrowings, or other liquidity sources to continue operating, but persistent losses threaten long-term viability.

Factors that contribute to a net loss

  • Low or declining revenues — weak demand, aggressive competition, poor pricing, or ineffective marketing.
  • High cost of goods sold (COGS) — rising input, production, or purchase costs reduce gross profit.
  • Excessive operating expenses — payroll, rent, utilities, taxes, insurance, and unexpected costs.
  • Carrying costs — high inventory holding costs (storage, spoilage, insurance) when sales are slow.
  • One-time charges — large legal settlements, restructuring costs, write-downs, depreciation or amortization, and interest expenses.

Examples

  1. State revenue shortfall
    If expected tax credits are claimed and reduce projected tax receipts by $99 million, the government may need to cut spending or face a fiscal net loss for the year.

  2. Simple company example
    Sales: $200,000
    COGS: $140,000 → Gross profit = $60,000
    Expenses: $80,000 → Net loss = $20,000

  3. Holding-costs example
    A frozen-food seller with slow sales must keep product in refrigerated storage longer, increasing utilities and storage costs. Those added carrying costs can push operations into a net loss even if gross margins are modestly positive.

Net loss carryforwards

Tax rules in many jurisdictions allow businesses to apply certain net operating losses against taxable income in other years. Treatment varies by jurisdiction and over time—legislation such as the U.S. Tax Cuts and Jobs Act (TCJA) changed how some NOLs are handled. Consult current tax guidance or a tax professional for specific rules that apply to your situation.

Frequently asked questions

Q: Can a company with positive revenues still have a net loss?
A: Yes. High COGS, operating expenses, taxes, interest, depreciation/amortization, or one-time charges can outweigh revenues and produce a net loss.

Q: Is a net loss the same as a “negative profit”?
A: Colloquially people say “negative profit,” but formally profit implies a gain; a shortfall is properly called a net loss or negative net income.

Conclusion

A net loss signals that a company’s costs exceeded its revenues during a reporting period. Understanding the underlying causes—whether revenue shortfalls, high COGS, or rising expenses—helps managers take corrective action. Tax rules may allow losses to be carried forward to reduce future taxable income, but rules vary and change over time.