What Is an Operating Loss (OL)?
Let me explain what an operating loss is: it happens when your company's operating expenses go beyond your gross profits, or revenues if you're in a service-based business. Your operating profit is what you have left before interest and taxes, and those aren't counted as operating expenses like cost of goods sold or selling, general, and administrative costs. Most companies bring in enough revenue to cover these and turn an operating profit.
An operating loss doesn't factor in interest income, interest expense, extraordinary gains or losses, or anything from equity investments or taxes. These are 'below the line' items, added or subtracted after the operating loss—or income if it's positive—to get to net income.
If you have an operating loss, you'll usually see a net income loss too, unless there's an extraordinary gain like selling an asset during that period.
Key Takeaways
- If your company's operating expenses exceed gross profits, you'll show an operating loss on the financial statements.
- An operating loss excludes effects from interest income, interest expense, extraordinary gains or losses, or income from equity investments or taxes.
- An operating loss shows unprofitable operations, so you might need changes to cut costs or boost revenues.
- Your company could also face an operating loss if it's reinvesting to expand business in the future.
Understanding Operating Losses
An operating loss means your company's core operations aren't profitable, and you need to make changes to increase revenues, decrease costs, or do both. The quickest fix is often cutting expenses, since that's under management's control. Think layoffs, closing offices or plants, or trimming marketing budgets as ways to reduce those costs. For startups, an operating loss is expected—they rack up high expenses with little revenue while trying to grow fast.
In most other cases, if it drags on, an operating loss points to weakening fundamentals in your products or services. But that's not always true if you're spending more short-term to hire staff, run new sales campaigns, or lease extra space for future growth. In that setup, you might see operating losses for a few quarters until the spending eases and the benefits show up in revenue.
Real World Example of Operating Loss
Take a manufacturing company: gross profit is sales minus cost of goods sold (COGS). In 2009, during the Great Recession, Huntsman Corporation posted an operating loss of over $71 million. Their gross profit was $1,068 million, but operating expenses—including selling, general, and administration (SG&A), research and development (R&D), restructuring, impairment, and plant closing costs—totaled $1,139 million, resulting in that loss for the chemical company. The restructuring charges alone were $152 million.
Expenses like that are usually non-recurring, so a normalized operating income would exclude them. Instead of the loss, an adjusted figure would show an operating profit of $81 million.
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