Measuring Business Interruption Losses and Other Commercial Damages, 3rd Edition

CHAPTER 5Projecting Lost Revenues

In most cases, lost profits resulting from a business interruption can be measured by first projecting lost incremental revenues and then applying a relevant profit margin to the projected lost revenues. This margin should reflect all the incremental costs that would have been incurred in an effort to achieve the forecasted incremental revenues. This chapter focuses on the first step of this process – the revenue projection. It covers the various projection techniques that can be used to create a “but for” revenue stream over the relevant loss period. These techniques vary from basic methods to more sophisticated ones. The chapter discusses the court’s position on the use of these methods. In addition to the techniques of forecasting, other related issues, such as the data on which the forecast is based, are discussed. Finally, the chapter details the special cases of forecasting “but for” revenues when there are very limited data, as in the case when the plaintiff is a newly established or unestablished business.

Projections Versus Forecasts: Economic Versus Accounting Terminology

Economists tend to use the terms “projections” and “forecasts” interchangeably. This was purposely done in the introduction to this chapter. Accountants, however, attach very different meanings to these two terms. When preparing prospective financial statements, accountants consider a financial forecast their best judgment of what is going to happen. This forecast ...