Diving Into the Net Profit Loss and How Market Research Helps Avoid It
It is in the best interest of businesses that seek to stay afloat to circumvent the net profit loss. An accounting term, net profit loss is a critical issue that businesses and market researchers must pay close attention to and endeavor against.
This term relates to profits, namely the lack of profits, when business expenses surpass revenue. As such, it represents a negative value for a company’s income. This value is recorded in the net income portion situated at the bottom of a business’s income statement, also called the profit and loss report.
Given the unpredictability of markets and events, take the COVID-19 crisis for instance, all businesses should be wary that they too may incur a net loss at any given time.
While there are mechanisms that help companies stay in business in spite of sustaining a net loss, they will not help a company survive in the long-term, as net profit loss is one of the main drivers of business failure.
This market research guide expounds on the net profit loss, including its causes and solutions, how to calculate it and more, along with how survey research can help businesses avoid it.
Understanding Net Profit Loss
This concept has several names, such as net loss and net operating loss, all of which refer to the negative value in income, which occurs when business expenses exceed the total income or total revenue during a specific period of time.
Thus, net loss refers to the negative consequence of businesses losing money, given that expenses do not merely carry the same costs as the total revenue, but exceed it.
Net loss is the opposite of net income, which refers to the case of income or revenue exceeding expenses, therefore producing a profit. Net income is also referred to as a net gain.
Business owners can check whether they have induced a net loss in their company’s income statement, which is also referred to as a Profit and Loss (P&L) Report. The net loss or net income appears at the bottom of this report, which is how business earnings gained their moniker of the bottom line.
This net loss issue is one of the chief risks that both startups and long-established businesses face. When left unaddressed and neglected, this problem can cause a company to permanently go out of business. This is because the lack of profits causes major financial damage that leads to bankruptcy.
Businesses can prevent going bankrupt should they take loans or use their retained earnings. However, these strategies are merely short-term safety nets; they cannot sustain a business in the long-term.
Therefore, this concern should not be solely left up to accountants to view and report, as all businesses must strive to steer clear of net profit loss.
The Causes and Solutions of Net Profit Loss
There are several contributing factors of net operating loss. Therefore, a business should examine all of these factors in relation to itself to determine which cause contributes the biggest dent to profit.
First off, low revenues are the greatest cause of net profit loss, which themselves include several factors. Low revenues can be the end result of an economic recession. For example, the COVID-19 pandemic caused major economic devastation in the US, in which 50% of people aged 25 to 44 lost their jobs, thus losing their spending power.
Other causes of low revenues include a strong competitive presence, poorly performing marketing initiatives, insufficient sales processes, low product demand, prices that don’t match the target market’s spending power and many other considerations.
Rising expenses are another cause and these can include anything required to maintain the business, from business headquarter costs, to marketing, to customer acquisition cost (CAC), to SaaS and marketing investments, to the cost of goods sold (COGS). COGS include all the costs required to produce the goods that companies sell and bring them to market.
Net loss also comes into being when a business’s products are low on demand. This can occur when products become obsolete or when a competitor offers either a more advanced version or a better quality or of the products. Thus, when product performance is insufficient, the demand for it drops, along with its sales.
Another cause of profit losses is that of poor management execution, which can occur in a number of disciplines, such as product, marketing, sales, customer support and others. For example, the product team may undergo delays. Or the marketing team may have run a poor campaign, one that draws little attention and leads.
A lack of brand tracking can additionally cause negative income statements since they can take a toll on a brand’s reputation. Companies that receive bad press, negative reviews or social media comments can sway the minds of even the most loyal of customers. This also ties into the idea of low product demand, as businesses who tout their products with heavy PR pushes can form a better public opinion of their products, thus pushing a business’s customers towards their competitors.
Finally, there is the receiving end of all marketing, sales and product efforts: the customers. Businesses can endure net loss when they do not have enough customers. This is typically a concern for new businesses along with those with scant brand equity. Brands with familiar names tend to reel greater customer loyalty and trust. However, even long-established brands can lose customers from a variety of factors, such as brand crisis, stiff competition or when businesses do not study their customers.
Businesses can avoid net profit loss in a number of practical ways. The following list enumerates several useful solutions to eliminate incurring profit losses.
- Businesses ought to create a fleshed-out budget and check it regularly in order to assure that all items continue to fulfill the budget.
- Businesses should remove expenses that no longer fit the budget such as martech and all other expenses, including business real estate costs.
- Marketers should execute quarterly campaigns set to increase sales, along with the sales team, which requires open communication and continuous collaborations.
- Brands should make reducing expenses one of their priorities. For example, rather than opening a new position, they should consider hiring a freelancer instead.
- Businesses should use the professional advice of accountants and advisors to ensure all operations can run smoothly without overspending the budget.
- Cutting down on store inventory and excess expenses is crucial. Businesses must first analyze their sales figures relative to their inventory. If there is a low demand for certain products, businesses should reduce manufacturing on them, as this will cut costs.
- Excess expenses also include administrative costs, office materials, labor costs and more.
How to Calculate Net Profit Loss
Calculating this metric is relatively simple. Its formula involves the same mathematical action as does the net income formula.
The formula for calculating net loss is to simply subtract all business expenses from the total revenue in a given period of time. This period can be quarterly, annual or centered on a specific campaign.
The following guide explains this formula in a step-by-step fashion:
- Calculate the total revenue your business generates from the resources it uses and their corresponding expenses.
- Net income and net loss are on the bottom line, while revenue is the top line in a P&L report or income statement.
- Layout all of your expenses in a particular time period. Add them all together.
- Finally, plug your values into the formula: (total revenue during X period) — (total expenses) = Net Profit Loss
Understanding a Profit and Loss Report
The profit and loss (P&L) report alludes to a report with a summary of all the income and expenses that a business retains and carries during a specific period of time. Also called the income statement, it lays out business losses relative to revenue.
This income statement can be formed on a weekly, monthly, quarterly or annual basis, depending on business procedure and formalities.
In this document, businesses are able to see whether they generated a net income, also called a net gain, or a net loss. It also shows a breakdown of all expenses, sales and revenue figures, so that businesses can see all the financial activity that they undergo.
A detailed ledger, the P&L report shows the ability of a business to manage its profits by reducing costs and driving revenue. It also allows businesses to examine cash flow, expense trends and general profitability so that they can informatively set up and tinker budgets, as well as allocate funds.
Examples of Net Profit Loss
The following provides several scenarios in which a business undergoes a profit loss.
Example 1
A business with an annual income of $100,000 incurs $120,000 in expenses related to running the business. This company has incurred a net loss of $20,000 for this year.
Example 2
A business acquires its competitor for $1 million. It generates a revenue of about $700,000 in this time period. It’s profit loss results in $300,000. However, it uses $300,000 in retained earnings to cancel out this loss.
Example 3
A local government overestimates the tax revenue by $150,000. In addition, it has road maintenance expenses that cost over $10,000 the funds it has due to snowy weather. Thus, its net loss is $160,000.
How Market Research Helps Avoid Net Profit Loss
Market research can help businesses avoid a net profit loss for any given period when conducted regularly and with the correct tools. There are various market research techniques, all of which provide key intelligence on a business’s overall niche, industry, competitors and target market.
Businesses can rely on both secondary and primary sources to have a better understanding of the trends within their niche, the demands of their industry and customers, their own standing and reputation and much more. This allows companies to create and execute well-informed business strategies and campaigns.
Most importantly, market research allows businesses to understand their customers, enabling them to better serve them. In this way, they can improve the reputation of their business, generate demand and increase revenue. This is because market research offers a vast pool of resources in order for businesses to acquaint themselves with their target market.
Survey research in particular offers the most potent form of market research, as it allows businesses to obtain their particular customer intelligence needs. Since it is a form of primary research, businesses gain the most updated information, whereas secondary sources may be months and even years old.
That is because even some of the most trusted sources of industry news and statistics recycle older information by merely updating a sentence on published articles, downloadable assets and resources. Sometimes, the only update they make to their sources is changing the date on old information to improve their natural ranking on search engines (a common SEO trick).
Additionally, secondary sources do not provide the unique insights brands need and specific inquiries they come across. They may also target segments of a target market that do not apply to a particular business.
Surveys, on the other hand, bypass both of these issues. They allow businesses to conduct campaigns suited precisely to their specific needs. Businesses can create a multitude of question types and ask questions on any topic of their choice. They can also target their specific target market segments if they use an online survey platform that allows for it.
Thus, surveys offer insights into all a business’s inquiries, allowing it to conduct valuable market research, understand the needs of its customers and avoid allocating funds on useless and inauspicious campaigns.
Reaching Profit Goals
The net profit loss is a somber reality for many businesses with insufficient customer intelligence. Market research is the antidote and surveys in particular can help businesses avoid profit losses by helping them focus on the needs, desires and aversions of customers.
This way, they can avoid unnecessary expenditures, save money and avoid overspending.
Survey research provides the most granular insights, as businesses can set their surveys up as they please. However, not all online survey platforms are equal in their functionality, capabilities, support and quality of data.
Thus, businesses ought to opt for a strong online survey platform, the kind that offers proven relentless quality, artificial intelligence and machine learning, a system that wards off low-quality answers and survey fraud, includes ease of use and deploys surveys across a wide network of publisher sites and apps via random device engagement.
The survey software that offers these functionalities and features will set up any survey campaign for success, bringing insights on a number of fronts, the kind that will effectively avoid the net profit loss.
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