Insights

If your business lost earnings from an event such as a fire, would you know how to calculate the loss for the insurance claim? There are many factors that would need to be considered in such an analysis: a lost profits analysis. First, you must determine the loss period and then calculate the lost profits over the loss period.

Basically, lost profits are the earnings a company would have made “but-for” a certain event. In simple terms, lost profits would be what the company would have made less what it actually made during the loss period. The tricky part is determining what the company would have made. One approach is to use historical earnings prior to the event to estimate what earnings would have been “but for” the event. However, this approach would only make sense for a company with an established history of consistent, stable earnings. Other factors would need to be considered such as reasons that the earnings might have been different than historical earnings.

Another approach is to use projections to estimate what the company would have made “but for” the event; however, the projections would need to make sense in light of historical earnings and industry analysis. Also, if the loss period is over an extended period of time, for example, over a 3-year period, the lost profits might need to be discounted to account for the time value of money. If you encounter an event where you might need help with a lost profits analysis, call Schneider Downs & Co., Inc. at 412-261-3644 and ask for someone in the business advisory services group to assist in this difficult analysis.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter

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