Page 48 - Calculating Lost Profits

Analysis of cost line items could involve steps such as discussions with management, review of the ac-
counting records and system, or review of supporting documentation of line items (for example, supply
agreements). For example, the expert may evaluate whether the accounting system shows regular charg-
es, such as rent and salaries, or inconsistent costs, such as legal fees, or both, which may be driven by
specific events, but may also be predictable. There may be patterns such as in businesses with seasonali-
ty. These patterns may be observable when looking at monthly data instead of annual data, or even by
looking at particular cost entries, such as on the general ledger or in account transaction detail.

The following is an X-Y scatterplot of food costs against revenue, as well as a calculation of food ex-
penses as a percent of revenue, for the years 2010–2016.

Figure 7.2. Total Company Food Expense Compared to Total Food and Beverage Revenue

As can be seen in the table and the chart, there is a strong correlation between food expense and reve-
nue. Given that the entity at issue is a restaurant, the finding that food costs rise as revenues rise is con-
sistent with what would be expected.

High correlation between costs and revenue is common in some line items, and particularly costs of
goods sold. But other cost line items, such as operating expenses, frequently show less correlation to
revenue. For example, the relationship between revenue and executive compensation expense is less
clear when analyzed on a percent-of-revenue basis and in an X-Y scatterplot.

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