Lost Profit Damages Calculation

Legal Compliance Resource
January 18, 2013 — 1,051 views  

In the field of accounting, profits are defined as the difference between the money invested by a businessman and the margin of gain attained on the same. Profits are perhaps the sole reason for the existence of many organizations. It is essential for lost profits to be considered while damages are being calculated. For instance, damages may be determined by the performance of a particular stock if claims are not executed or if instructions aren’t correctly followed.

Why Attorneys need to Understand Financial Documentation

Lawyers and attorneys must be able to calculate lost profits of their clients. However, they often delegate mathematical and financial duties to the experts. Finances and legal representation go hand in hand in case of damages. Liabilities will have no meaning if there are no damages reported and damages will be meaningless in case of no liability. Hence, lawyers must be equipped to carry our financial calculations of lost profits.

Every registered business is required to prepare a timely profit and loss statement so as to demonstrate its performance over a particular period of time. In legal cases, the financial statements are computed by the company’s clients and presented to the court by an attorney. While this may be a substantial solution for all parties involved, the effectiveness of a lawyer’s work can be significantly enhanced if he has received quality education in finances. For instance, attorneys will have complete access to all financial data related to a particular case at all times. This will help them better prepare for cases in the court of law. In addition, litigants can also easily establish whether or not other factors contributed to the loss in profits.

One of the main benefits of lawyers who receive specialized education in finance is that they can easily determine the cause of losses. Moreover, an attorney with a specialization in finance will be able to forecast the performance of a business. He can ascertain general damages, consequential, or special damages with reasonable certainty.

Lost profits are defined as the difference between the profits actually made by a business and the profits it was expected to make. Lost profits have five major characteristics such as net profits, incremental profits, but-for profits, pretax, and reasonable certainty damages.

Calculation of Lost Profits

Lost profits can be calculated on the following bases:

  • Before and after
  • Accounting for profits
  • Sales projection
  • Yardstick
  • Economic modeling
  • Market share

Calculation of ‘before and after’ profits is done to compare the profits gained before a ‘bad act’ was committed with the profits gained after the “bad act”. Accounting for profits is an effective method of lost profits calculation that usually refers to the defendants’ accounting records and establishes profits or sales. The method of sales projection calculates the profits of a business after a “bad act” and compares it with an estimated performance before such an act.    

The method of yardstick is based on comparison of profits in certain periods, so as to check the level of performance from time to time. Calculating lost profits through the method of economic modeling will determine lost profits based on the economic characteristics of the business and the market. The market share calculation of lost profits takes into account a particular market share and checks if profits are maintained or achieved.

So, if a lawyer has knowledge of these financial issues, he will no longer have to depend on financial personnel for calculation of complex problems. 

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