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.
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.