What are Lost Profits and Why Should You Care?
Lost profits are the earnings you missed out on because something—an incident—affected your ability to perform. These incidents can be anything from a natural disaster, a breach of contract, or even negligence on part of another party. If you can establish a link between the incident and your lost profits, you might be eligible for compensation.
Why should you care? If your business has suffered due to such an incident, recovering lost profits can be a crucial part of your financial recovery. They are not just abstract numbers but real dollars that can affect your operations, expansion plans, and even salaries.
How to Calculate Lost Profits
The formula you need is:
[\text{Lost Profits} = \text{Profits Before Incident} - \text{Profits After Incident}]
Where:
- Profits Before Incident is the earnings you made over a specific period before the incident occurred
- Profits After Incident is the earnings you made over the same period after the incident occurred
It's crucial that the timeframes for both sets of profits are identical. For example, if you want to measure the impact over 10 days, make sure you're comparing profits from 10 days before and 10 days after the incident.
Calculation Example
Suppose your business was doing great until an unexpected power outage disrupted operations. This caused a significant dip in profits, and you want to calculate how much you lost.
Here's the data:
- Profits Before Incident: $25,000
- Profits After Incident: $15,000
Using the formula:
[\text{Lost Profits} = 25,000 - 15,000 = 10,000]
In this example, you've lost $10,000 due to the incident.
| Timeline | Profits |
|---|---|
| Before Incident | $25,000 |
| After Incident | $15,000 |
| Lost Profits | $10,000 |
Lost profits aren't just theoretical; they're real, calculable figures that can significantly affect your business.