RABCPA PC Blog
Understanding the key to lost profits.
There seems to be a great deal of misunderstanding when we discuss lost profits with clients. Most of the time they think they are entitled to their sales that they would have made or projected to be made. However, this is unrealistic. When you do not have sales that also means that you probably do not have expenses that typically go with those sales. This is sometimes known as avoidable costs, because costs that would have been incurred in connection with sales, were not incurred because revenues were lost. For example, if you have to pay commissions you would expect your payroll to decrease. Also, you have to attempts to mitigate or lessen your losses, you cannot take advantage of a bad situation.
You have to have a good understanding of cost behaviors when calculating damages. There are basically three types of costs; variable, fixed and semi-variable costs.
The formula for lost profits is:
Lost Profits = Lost Revenue - Avoided Costs
We have many methodologies and techniques for calculating lost sales and damages.
We had a national furniture retailer that contacted us a few years back. They had a location next to a major highway and the furniture store received a lot of traffic from this highway based on a large billboard located on the highway that advertised their stores offerings, Apparently, people passing would see the large billboard and then pull off at the next exit and make a right turn into the furniture store. At some point however the State of New Jersey undertook a major project to upgrade the highway that resulted in their sign being obstructed and the turn that allowed cars to easily get to their store was closed for over a year.
This all occurred during a downturn in the economy and as a result of the lost business the furniture store had to close one of their top locations in the country. This is a tricky case, because we had two factors to deal with; a recession and also the loss of traffic due to the state’s construction on the highway.
The furniture retailer needed our firm to calculate not only the lost sales for the prior year but also project the lost sales and profits into the foreseeable future. Essentially, we were stating that not only did they have lost profits, but the construction actually destroyed the business, which meant lost business value.
This is a very complex undertaking, because first we had to determine the stores approximate growth rate, then determine lost sales from the recession and lost sales from the construction. Once we had that we then had projected sales into the future. Once we had those numbers, we then had to figure out what type of profits they could expect. We did all the work and went through several rounds of depositions before the case settled out of court.
From Robert L. Dunn’s book Recovery of Lost Damages for Profits:
The Proximate Cause Rule:
“Recovery of damages for lost of profits is subject to the general principle that damages must be proximately caused by the wrongful conduct of the defendant. The principal governs the recovery of all compensatory damages. The requirement that lost profits damages must be proximately caused to be recoverable is expressed in innumerable cases.”
Cases Analyzing the Reasonable Certainty Rule:
Courts have modified the “certainty” rule into a more flexible one of “reasonable certainty.” In such instances, recovery may often be based on opinion evidence, in the legal sense of that term, from which liberal inferences may be drawn. Generally, proof of actual or even estimated costs is all that is required with certainty. Some of the modifications which have been aimed at avoiding the harsh requirements of the “certainty” rule include: (a) if the fact of damage is proven with certainty, the extent or amount thereof may be left to reasonable inference; (b) where a defendant’s wrong has caused the difficulty of proving damage, he cannot complain of the resulting uncertainty; (c) mere difficulty in ascertaining the amount of damage is not factual; (d) mathematical precision in fixing the exact amount is not required; (e) it is sufficient if the best evidence of the damage which is available is produced; and (f) the plaintiff is entitled to recover the value of his contract as measured by the value of his profits.
Key elements of a lost profit claim
Plaintiffs loss is proved with a reasonable degree of certainty
Trier of fact is satisfied that the wrongful act of the defendant caused the loss of profit
There is a basis for the claim, example; breach of contract
Three things that must be proved by the plaintiff
The defendant breached a legal duty to the plaintiff
Defendant’s actions or failure to act damage the plaintiff
The plaintiffs damages are proximately related to the defendant’s actions or failure to act
The first step in computing lost profits is to determine the lost revenue.
Typically, we call this the revenue the plaintiff could have earned but for the defendant’s actions.
The three generally accepted ways to estimate lost revenues are:
Posted April 23, 2020 by Business Damages
I would say about 33% of our forensic accounting work is related to Estates, Trusts and Wills or lack thereof. Usually the problems begin with poor record keeping, tax issues or outright fraud and theft. Today I am going to review some basics of estate planning so you can avoid or minimize some of the pitfalls.
We had a case a while back where our firm was appointed by the court to take over and manage a wealthy widow’s finances. She was having some minor issues with dementia and her heirs. The problem we had was that the children lived throughout the country and they would invite their mom to stay with them. At one point she went to Florida to stay with her daughter, and she stayed for a very long time. The other children insisted that she was being held captive by their sister. Eventually she would leave and go to New York and the same thing would happen. It is as if she was being constantly kidnapped, and because of her dementia she was unable to leave. When she was on these trips large amounts would be charged to her accounts and credit cards. The sad thing was that she was a Holocaust survivor. It was like she was in “The Hotel California” (by the Eagles)
“Welcome to the Hotel California Such a lovely place (such a lovely place) Such a lovely face. They livin' it up at the Hotel California What a nice surprise (what a nice surprise), bring your alibis
Mirrors on the ceiling, The pink champagne on ice And she said, 'we are all just prisoners here, of our own device' And in the master's chambers, They gathered for the feast They stab it with their steely knives, But they just can't kill the beast
Last thing I remember, I was Running for the door I had to find the passage back to the place I was before 'Relax' said the night man, 'We are programmed to receive. You can check out any time you like, But you can never leave!”
Eventually we were able to put a stop to all the nonsense and resolve the financial issues.
If you do not want something like that to happen to you here are some tips:
You may want to sit down and make a list of all your assets and who you would like to inherit It is important to think about medical issues should they occur, beneficiaries for your young children or animals, etc. Make a list of all your assets and where they are held.
If you have a business, succession planning is important. Typically, we like to see an AB Trust set up so that you can maximize the estate deduction and still have some type of control over the business.
How are the assets titled; joint tenancy - cheap and easy to do. The assets pass directly to the joint person..
Remember your pension plans and IRAs generally have beneficiaries and they should be updated.
Once you do this you should probably talk to your CPA and your attorney about how to proceed with setting up a will and/or trust.
Types of wills; Simple Wills, Testamentary Trust Will, Pour Over Will, Oral Wills, Joint Wills, Living Wills. There are several different types of wills, but the important thing is to make sure you have one.
The big question is, when is a trust better than a will?
A trust provides more structure
Protects your privacy
It can reduce estate taxes
If it is a living trust the trustee can manage property for you while you are alive
Trusts are generally more difficult to contest than wills
Trusts are more flexible than wills
Trusts can impose greater discipline on beneficiaries
There are several kinds of trusts, and in order to pick the one that is right for you and meets all of your requirements you will need to talk to a CPA and an attorney. A few trust types are Revocable Trust, Irrevocable Trust, Dynasty Trust, Insurance Trust, Living Trust, Special Needs Trust, Spence Thrift Trust and Testamentary Trust.
The biggest problem you can have with wills and trusts is that the person you have managing the assets is not competent. The most important thing you can do, once you set up an estate plan is to designate a reliable executor, executrix or trustee. It all depends on the nature of your estate, your family situation and other factors.
The main thing to remember is to have some idea of the potential executor and the pros and cons of each when you meet with your attorney to plan your estate
Talk to the executor or trustee and make sure they understand the importance of good record-keeping
Make sure they can pick good advisors to help handle taxes and legal issues
Make sure they have a good disposition and are mostly grounded
Name someone younger
You never will find the perfect trustee or executor but picking the best one possible will save a great deal of headaches
Posted April 23, 2020 by Forensic Accounting
How to negotiate for the purchase price and buy the car. Generally, I like to maintain a friendly relationship with the dealership and salespeople. It’s more fun and you may need them in the future. Dealerships and salespeople are good for future advice, maintenance, and repair services.
You should only enter the dealer showroom when you know what type of car and the options you want and how much you should pay for the car.
Make sure you learn how to use your calculator, either bring one or used the one on your cell phone. You need it to calculate loan payments and check the dealer’s paperwork. % of car purchase agreements have errors based on my experience.
Bring a pad, pencil and a pen to the negotiation, obviously the dealers are not going to provide one to you.
When you go to buy your car go on a day when they’re not busy typically at the end of the month on a Monday, Tuesday or Wednesday. I like to go late in the afternoon.
Let the dealer know you’re ready to buy a car today. If he asks, tell him you will discuss financing and other issues after we’ve negotiated the price of the vehicle. Try and avoid telling him that you already have financing in place. Once you have the car price negotiated you can then discuss the financing alternatives (reiterate to him you’re buying a car today, if the price is right). Salesman may try to complicate the negotiations to confuse you, you need to keep them uncomplicated.
Once you have negotiated the car price, you then can negotiate for after sale items that you may want, like tire insurance, or free lifetime oil changes etc. Once everything is agreed to you then may want to discuss a car trade or down payment, but you want to keep the negotiation as uncomplicated as possible. Remember you can sell your car yourself or use Autotrade.com
Posted April 2, 2020 by Forensic Accounting