But the company has predicted that its upcoming switch to a new biomass plant at its Markinch site will herald an improvement in its commercial fortunes.
The employee-owned business, whose operation in Fife makes paper for greetings cards, corporate reports and luxury packaging for drinks and cosmetics, cited the dual challenge of rising energy costs and uncertain trading conditions as its operating losses grew to £1.7 million for the year to March. This compared with a £1.3m operating loss last year.
Pre-tax losses narrowed to £3.26m from £4.02m because of lower interest charges and a fall in exceptional charges from £644,000 from £1.6m. This reflected a decrease in the amount set aside for redundancy provision, after the company had laid off 30 staff in its previous financial year. Turnover fell 3.8% to £159.5m.
In spite of widening operating loss, the company said it had maintained a strong balance sheet and remained debt-free, having closed the year with net positive funds of £2.7m.
Group chief executive Chris Parr said: "Obviously it is never acceptable to be in loss-making position, but given some of the challenges that we have been facing over the past few years, it is not unexpected.
"The important thing is that we have retained a very strong balance sheet and we don't have any debt. That has been our primary focus.
"To maintain that while we put in all the necessary remedial steps to get the business back into the black [is positive]. A key element of that will be the successful final implementation of the biomass plant, which we are expecting calendar quarter one in 2014.
"That will give us significant savings, it will give us significant efficiency improvements, and of course it will reduce our CO2 footprint by 72%."
The £200m combined heat and power plant (CHP) will replace by the existing coal-fired facility at the firm's Markinch mill.
The plant, which has been built and is owned and operated by RWE Npower Renewables, will meet all of Tullis Russell's steam and electricity needs.
RWE has a 20-year lease on the site, with Tullis Russell striking a deal with the utility that will see it take 17 megawatts (MW) of the plant's maximum 62 MW capacity at peak times. RWE will sell the excess to the national grid.
Tullis Russell, which has about 500 staff in Fife, is also taking steps to grow its global footprint.
The company operates specialist coating companies in Cheshire, where it employs 105 staff, and South Korea, where its head-count is 85. Those plants make paper for applications such as lick and stick stamps, visa papers and transfer papers for ceramics and textiles.
Last year the business saw sales grow by 46% in Asia and 40% in North America, which helped offset falling revenues in the UK and western Europe. Mr Parr said a key part of the firm's strategy was to achieve "further afield markets", adding that it also placed emphasis on continuous improvement processes to improve its efficiency.
He insisted the company's ownership model meant it had not had to contemplate reducing its head-count to improve its balance sheet in the short term.
Mr Parr said: "We're obviously employee-owned. That means our core driving force is operating a sustainable employee-owned business into the future.
"That doesn't mean we are not commercial and that we don't take difficult decisions when they require to be taken.
"But it means that our capital is a bit more patient capital, so we can afford to plan for the long-term.
"The losses we have experienced over the past few years were not unexpected given the market context, but we have committed to putting things in place to trade through that, as opposed to, perhaps, as a plc, we'd have to take out the axe and make some pretty dramatic cuts that might improve the short term but not necessarily the long-term fortunes of the business."
Mr Parr said conditions had eased but remained challenging in the current year. But he said the firm's lack of debt meant it had the "time and breathing space" to focus on the business and respond to challenging global markets.