How can businesses run on a loss?

Question

There are usually big companies that always report losses at the end of the year, but they still operate the next year. How do they do that?

Answer 1

All the other answers have ignored a real reason why a company can report a loss, but can actually have positive cash flow.

The key word is Depreciation, which is a non-cash loss that shows up on annual income reports. Here's how depreciation works to create a paper loss, when there is actually positive cash flow.

In this example, the company has sales of $1 million, with expenses of $950,000. It has positive cash flow of $50,000.

Here's where Depreciation comes in. The company has equipment that is used to make products, and that equipment. The equipment was purchased for $500,000, and has a useful life of 5 years. The cost of the equipment is depreciated over a period of 5 years, at $100,000 each year. So, on this year's income statement, $100,000 shows up as an expense, (although it is a non-cash expense.) And The company that had $50,000 in positive cash flow reports (correctly) a $50,000 loss.

This is just one way that firms can show a loss and still operate, but it a very important one that affects both small and large companies.

Answer 2

These loss you are talking about generally is their projected sales/earnings...or they can as well be talking about the loss of share value.

Also, these loss maybe the profit not necessarily the assets of the company. If you take accounting classes this is a simple concept. But look at it this way, if you don't make the projected earnings and you are still looking to increase your company's profit you will invest in tangible or intangiable assets...however, you do not aquire the projected amount to do so, a company may sell their shares or may (like GM) do a round of lay-offs. So basically, that company may not be able to proceed with aquiring a purchase of another company or etc.

These really are important to know if they are constantly buying and selling shares...however, for the common folk if you have very little shares then it's not important as that values fluctuate everyday.

Answer 3

Because these losses are on paper only and the company has positive cash flow to maintain its day-to-day operations.

Answer 4

The companies have such great losses, but they can afford to have such losses because they are so large. If it was a small company they would have to throw in the towell. Plus, since they are so large, they can expect to continue to get loans from other large banks and such, of course they have to project gains in the future to appeal to the lenders that they really will turn thigns around. How many large companies, or any for that matter have you seen running at a loss every fiscal year?

Answer 5

profit and expenses can equal loss. Though they operate at loss for a year or two, the following year their profit could go through the roof and compensate for losses in previous years

Answer 6

Example 1:
You have $100 Billion in the bank and use $50 Billion to buy chinese things (Like Wal-Mart)

You hope to sell them for $51 Billion in the future to obtain profit.

Alas, you sell them for $49 Billion and you lose $1 Billion.

You still have $99 Billion to try for another year.

Example 2:
You have a $10 Billion line of credit and use $5 billion to make cars (Like General Motors)

You hope to sell them for $5.5 Billion in the future to obtain profit.

Alas, you sell them for $3 Billion and you lose $2 Billion.

You still have $8 Billion to try for another year.

Answer 7

they accrue what is called debt.