Is the accumulated loss identical to the actual result?
The answer in a nutshell: no , usually not. So what’s the difference? The balance sheet loss is basically calculated as described from the annual surplus or annual deficit by correcting these values by the reserves and profit or loss carried forward. The resulting amount is the balance sheet loss – a purely theoretical quantity that shows what amount is over to be used, for example for a distribution.
The actual result can therefore also be that a company has generated a significant surplus in one year, but the value of the retained earnings is negative due to high loss carryforwards. An achieved annual surplus does not protect against a balance sheet loss per se.
What are the consequences of a balance sheet loss?
The specific consequences of a balance sheet loss depend heavily on the other situation of the company.
Balance sheet loss – financial consequences
A long-established company that has to go through a bad year usually has retained earnings. An annual deficit can therefore be easily compensated for using the reserves . A balance sheet loss would be a big alarm signal here to initiate restructuring measures.
The situation is different with start-ups that consciously have a certain “burn rate”, that is, they act in the knowledge that losses will be made. The annual deficit comes as little surprise here. At the same time, there are no retained earnings, so there is a need for financing. This is usually planned for start-ups. In concrete terms, this means that the founders must always try to estimate how much capital is required to keep the company afloat. In most cases, this capital will be made available by selling shares to investors. The aim here is not to cover balance sheet losses with reserves created from profits from previous years, but with fresh capital that flows into the company from outside.
Regardless of the size of the company, a balance sheet loss does not mean that panic has to break out, but it does mean that special attention must be paid to finances. Temporary annual deficits can usually be compensated, but this should not result in a permanent situation .
Balance sheet loss – signal effect and image problems
Aside from the financial aspects, a balance sheet loss can also damage the company’s image. In this respect, however, it depends on the rest of the situation, because while capital requirements are completely normal for start-ups, medium- sized companies can easily get into image problems.
The consequence of a balance sheet loss is that no distributions can be made. In addition, there is the loss carryforward in the next year, which means that it is already foreseeable that only lower funds will be available for distributions in the following year. Anyone who invests in a start-up does not expect quick annual payouts. However, it is different with stock corporations or large corporations, which should actually bring their shareholders regular inflows.
This negative situation and the poor outlook for the following year are of course not welcomed by investors. Therefore, larger companies usually do everything to avoid having to report a balance sheet loss. If necessary, one-off effects are often achieved here, which avert a potential balance sheet loss, in order not to get into this passive, bad position.
Loss carryforward – effects in the following year
The loss carryforward can also trigger a certain image problem for investors. Even if it is foreseeable that the company will generate a surplus in the next year and things will look up again, the loss carryforward must first be offset. The consequence is that less capital is available for distributions . The return prospect for investors is therefore reduced, since we are not focusing on the distribution, but primarily the loss order resulting from the balance sheet loss must be covered accordingly.
The balance sheet loss can ultimately either be offset by the addition of fresh capital or through existing reserves. The slightly damaged image, on the other hand, may take a little longer to be corrected into positive again.
The balance sheet loss says nothing about the annual surplus or the annual deficit that a company has generated. Rather, it is a measured variable that results in the following, taking additional parameters into account. In many situations, a balance sheet loss can be easily absorbed by a company. Start-ups in particular are mostly aware that there will be balance sheet losses.
It is important for entrepreneurs to counter balance sheet losses with good planning, because after all, the balance sheet loss has to be compensated for sooner or later. One possibility is to build up retained earnings in good times in order to be prepared for later, potential balance sheet losses. Another option is to offset with new capital, which requires that shares in the company can be sold and that there is also the will to do so.