When the costs of a company engaging in its business exceed the revenue that it generates, there is an operating loss. A simplified way of determining if there is an operating loss is to calculate a business' expenses for a given period and to subtract that amount from the total amount that was earned by the company during the same period. If the resulting number is negative, the company has experienced an operating loss. Although such a situation is not sustainable, it does not always mean immediate doom for a company.
The purpose of doing business is generally to acquire profits. To achieve this goal, a company must be able to cover the costs of doing business, such as paying for raw materials, distribution, and labor. Once all expenses are paid, if there is still money left over, these are the profits. In some cases, however, a business cannot adequately cover its expenses, which means that the costs of operating the company exceed the amount of money that was earned. This situation is referred to as an operating loss.
It may seem impossible for a company to remain in business if it experiences an operating loss. There are several reasons why this is often possible. To begin with, credit can be used to offset a business' deficit. A business may not have the cash to pay its bills, so it may place the expenses on credit cards just as individuals do. In many cases, businesses are also allowed to accrue debt that does not need to be immediately repaid.
Another reason that operating loss does not necessarily mean immediate doom is because accounting is usually done for specific periods. For example, a company may review its finances on a quarterly or biannual basis. Within a given quarter, the company may have experienced an operating loss, but the company may have been operating profitably for 10 years. This means that, although there was a loss during a given period, the company should still have adequate financial resources.
In some instances, an operating loss may be beneficial. If a company has earned substantial profits throughout most of a year, a quarter of loss may help to offset some of its tax liability. Over the long term, however, this type of loss cannot continue. At some point, if a company does not profit or at least break even, it will not be able to sustain its operations.
