How to Calculate Business Income Losses

Subtract expenses from revenues to calculate net losses.

If you're in business for yourself, then you probably want to make a profit. However, it's not uncommon to incur a loss for the first few years of business, especially if the economy is in a recession. Losses are calculated when costs exceed revenues. The most common cost buckets are inventory and the direct labor associated with inventory, operating costs, salaries, interest expense and provisions for taxes. However, if your company incurs a loss you will not have to pay taxes.

Instructions

1. Obtain total sales for the company for the past year. Assume total sales are $100,000.

2. Calculate gross profit. Subtract the cost of goods sold (which includes direct labor) from sales. If the cost of goods sold is $20,000, then the gross profit is $80,000.

3. Calculate operating profit. Operating profit is gross profit minus operating costs. Operating costs include salary, rent, utilities, and any other cost associated with maintaining operations. Assume operating costs are $80,000. $80,000 minus $80,000 equals $0.

4. Calculate business net income loss. Subtract interest expense and any provision for taxes from operating profit to calculate net income. If interest expense is $1,000 and the provision for taxes is $0, since net income is $0, the total net income is negative $1,000.

References

• U.S. Securities and Exchange Commission: Beginners' Guide to Financial Statements