The Three Methods A Forensic Accountant Uses To Estimate Lost Profits

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Hello, my name is Barbara Mason and if you're interested in starting your own business, there are many resources available in this blog. You'll learn about start-up costs, securing inventory, hiring employees and customer relations. You'll also learn information about the legal aspects of owning a business, such as registering your business name and obtaining business permits and a license. I don't own my own business, but my sister does and that's why I'm so familiar with the aspects of starting a business. I helped my sister get everything in order before she opened her doors for business and there was a lot to do. Many people want to start their own business and I wanted to make it easier for everyone by writing this blog. I hope that after reading this information, it will help you to have a successful grand opening too.

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The Three Methods A Forensic Accountant Uses To Estimate Lost Profits

11 August 2017
 Categories: Business, Blog


If your business has filed a lawsuit against an individual or business alleging that someone's harmful or wrongful actions caused your business to sustain a loss, you may be looking to recover your financial losses as part of the lawsuit. However, most businesses do not earn the same amount of money from month to month. As such, proving the damages you sustained can be challenging. This is where a forensic accounting service like MacKenzie & Company LLC can help. One of the things that they can do is to help determine losses that businesses sustained. Here are the three methods that a forensic accountant may use to estimate lost profits so you can substantiate the amount you are asking for in court. 

The "Before and After" Method

One method that a forensic accountant may use to estimate lost profits due to a bad act is the "before and after" method. A forensic accountant will examine your financial records and determine what they looked like in the periods before the harmful or wrongful act was committed against your business. They can estimate how much your profits would have been based on your current growth and past patterns, helping to determine just how much business you lost as a result of the alleged incident. 

The Yardstick Approach

When a forensic accountant uses the yardstick approach, they look at other businesses within the same industry as yours that are similar to yours. They then look at how much money those companies have made and how much they have grown. This method takes into account the current economy and current need for the product your company provides. The amount of growth and sales these companies have shown is then applied to your business, helping to show where you may be if not for the alleged bad act that someone performed against your business. 

The Hypothetical Profits Method

If you have a fairly new business that is unique in nature, the forensic accounting service may have to use the hypothetical profits method. In this method, the accountant has to look at what need there was for your business in the area and what your growth may have hypothetically looked like if the individual or business involved in litigation with you had not damaged your business. This is the least reliable method and should only be used when there is not enough information to obtain a reasonable estimate using the other two methods. 

If a company or individual slandered your business, made claims simply to hurt your business, filed a malicious lawsuit to damage your business reputation, physically damaged stores or products or otherwise created some sort of loss to your business, you may be able to sue them to recover your lost profits. A forensic accounting service can help you show the courts why you are requesting the amount you are and the losses your business has suffered as a direct result of someone else's actions.