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December 2014

Loss of profit calculations

As Forensic Accountants we are fully aware that the calculation of loss of profits is not always as simple as it could be.  In cases of business interruption, profits may be lost for a period of time (the interruption) and then return to pre interruption levels, so in theory the loss in the interruption period is simply the likely profits given the known pre and post interruption actual profits.

The calculation would be a simple one if no other factors impacted on the calculation, but of course that is not how things work in reality.  Take the recent case of Sugar Hut Group v AJ Insurance (2014) EWHC 3352 (Comm) in which a fire at the Sugar Hut Club in Essex resulted in a claim for loss of profits during the 49 week period that the club was closed following the fire.

The Forensic Accountants did not agree on the basis of calculation of profits in the interruption period which occurred in 2009.  Factors which complicated the calculation included - recession following the banking crisis of late 2008 - lack of reliable accounting information (presumably lost in the fire) - the post interruption profits benefitted from the £1.5m investment in improvements to the club post fire - and the fact that the Club became famous following its featuring in the TV series The Only Way is Essex (the TOWIE effect).

Therefore, the straight comparison of pre-fire to post-fire profits was not a reliable method of gauging the likely profits in the interruption period.  The impact of each factor had to be considered but as the Judge recognised in his own calculations "this exercise is somewhat crude and inexact but, in my view, it presents a reasonable assessment in the particular circumstances of the present case".

As is common in many cases where a calculation of the loss of profits is required, the method will not be an exact science and reasonable assumptions will be needed where gaps in information exist or a range of potential outcomes is possible.

A range of loss will need to be postulated by the Forensic Accountants, based on their experience and the specific assumptions necessary for each case.  This will allow, by use of financial modelling, the losses to be flexed depending upon the findings of fact.

We have a wealth of experience in calculating loss of profits.  Please give Adrian Pym a call to see how Prime Forensic can help your case.