Page 33 - Calculating Lost Profits

Chapter 6

Estimating Lost Revenues

Overview

The steps in determining lost profits typically follow the order of the income statement because the
overarching objective of a lost profits damages analysis is to calculate the amount of lost profits incurred
due to the defendant’s wrongful acts, as covered by the plaintiff’s claims. fn 1 With this in mind, one of
the first elements in the calculation of lost profits is the estimation of lost revenues. Lost revenues are
the monetary amount of sales (or other revenues) that have not and will not be earned by the plaintiff, as
a result of the defendant’s wrongful acts. As explained in chapter 3, this is sometimes referred to as the
amount of sales the plaintiff would have achieved "but for" the defendant’s wrongful acts, less the actual
and mitigating revenues.

The law does not generally prescribe a specific process or methodology to measure lost revenues. In-
stead, credible measurements of lost revenues are commonly made when practitioners perform analyses
such as the following:

 Understanding the allegations at issue and what wrongful acts are alleged to have occurred

 Understanding the agreements or contracts at issue

 Requesting, analyzing, and understanding relevant documents and information

 Assessing the reliability of available information

 Determining the applicable methods to use and prepare an estimate of lost revenues

 Reviewing the lost revenues estimate for reasonableness.

While estimations of lost revenues are enhanced by analytical steps, including those listed previously,
they may also prove helpful in other parts of a lost profits analysis, a damages analysis, or a more gen-
eral analysis in a dispute context. For example, identification of the loss period, avoided costs, or lost
business value could follow a similar process. Each of these steps in estimating lost revenues is dis-
cussed further in the sections that follow. Although they are presented sequentially, the order or necessi-
ty of these steps may vary. For example, after preparing an estimate of lost revenues, it may be neces-
sary to do additional research or request additional information. Or, early versions of contracts may be
part of the documents requested after an initial review indicates that they are relevant.

fn 1 As described in previous chapters, a lost profits calculation is based on a comparison of the but-for world to the actual or mitigat-
ing world. The difference between these worlds is traceable to the wrongful acts that fall within the plaintiff’s claims and causes of
action.

© 2020 Association of International Certified Professional Accountants 31