Net loss happens when the total expenses of a company exceed the total earnings. The resulting figure is negative, hence the term loss.
In general, start ups or new companies usually run at a net loss for the first few years of their lives. This is due to the fact that they have to spend a lot of cash on initial expenses, usually one-time expenses. While running at a net loss is expected and accepted for the first few years, every company must strive to reach the breakeven point sooner than later. If a company fails to meet the breakeven point for so long and keeps running at a net loss, it will be forced to source additional capital, or even close down.
To compute for the net loss, one has to start with the total earnings of a company – just how much it is worth for a certain period of time. This figure includes all the assets of the company. The next step is to add up all the expenses of the company. The total figure will include taxes, operating expenses, loans, debts, and all other liabilities. This total figure will then be subtracted from the total earnings, and if the resulting figure is negative, it is termed net loss.
