Lost Profits Calculator
This tool helps you estimate financial losses by comparing expected profitability during a specific period versus the actual profitability achieved during the same period.
Enter your projected Revenue and Costs (what *would have* happened) and your actual Revenue and Costs (what *did* happen) for the period affected by a disruptive event.
Enter Financial Data for the Affected Period
Understanding Lost Profits Calculation
What are Lost Profits?
Lost profits represent the earnings a business or individual would have reasonably made had a specific event, interruption, or breach not occurred. It's the difference between the hypothetical "but-for" scenario (what should have happened) and the actual scenario (what did happen).
Basic Lost Profit Formula
The fundamental concept is comparing expected outcomes to actual outcomes:
Expected Profit = Expected Revenue - Expected Costs
Actual Profit = Actual Revenue - Actual Costs
Lost Profit = Expected Profit - Actual Profit
This can be combined into:
Lost Profit = (Expected Revenue - Expected Costs) - (Actual Revenue - Actual Costs)
Key Considerations
Calculating lost profits accurately often requires careful analysis of financial records, market conditions, and expert testimony, especially in legal or insurance contexts. This calculator provides a basic quantification based on the provided inputs.
- Time Period: Define the specific period during which profits were lost.
- Expected vs. Actual: The core challenge is accurately determining the "but-for" scenario (expected). This often relies on historical data, forecasts, and industry trends. Actuals come from records during the affected period.
- Relevant Costs: Only include costs directly related to generating the revenue. For example, variable costs might change with revenue, but fixed costs might remain even if revenue drops. A more detailed analysis might differentiate between cost types. This basic calculator assumes total costs associated with the respective revenue levels.
Lost Profit Examples
Click on an example to see a step-by-step illustration:
Example 1: Business Interruption
Scenario: A small shop is forced to close for one month due to flood damage.
1. Affected Period: One Month.
2. Known Values:
- Expected Revenue (based on previous months): $15,000
- Expected Costs (variable costs on $15k sales): $7,000
- Actual Revenue (closed): $0
- Actual Costs (some fixed costs like rent): $2,000
3. Calculation:
- Expected Profit = $15,000 - $7,000 = $8,000
- Actual Profit = $0 - $2,000 = -$2,000 (a loss)
- Lost Profit = $8,000 - (-$2,000) = $8,000 + $2,000 = $10,000
4. Result: Lost Profit = $10,000.
Conclusion: The business lost $10,000 in profit during the month of closure.
Example 2: Supply Chain Disruption
Scenario: A manufacturer can only produce half their usual output for a quarter due to a material shortage.
1. Affected Period: One Quarter.
2. Known Values:
- Expected Revenue: $500,000
- Expected Costs: $300,000
- Actual Revenue: $250,000
- Actual Costs (variable costs reduced, some fixed costs): $180,000
3. Calculation:
- Expected Profit = $500,000 - $300,000 = $200,000
- Actual Profit = $250,000 - $180,000 = $70,000
- Lost Profit = $200,000 - $70,000 = $130,000
4. Result: Lost Profit = $130,000.
Conclusion: The disruption resulted in $130,000 of lost profit for the quarter.
Example 3: Event Cancellation
Scenario: An outdoor festival is cancelled last minute due to extreme weather.
1. Affected Period: Duration of the festival.
2. Known Values:
- Expected Revenue (ticket sales, vendors, sponsors): $50,000
- Expected Costs (variable costs tied to attendance): $10,000
- Actual Revenue (some non-refundable sponsor fees): $5,000
- Actual Costs (fixed costs like venue rental, non-refundable deposits): $12,000
3. Calculation:
- Expected Profit = $50,000 - $10,000 = $40,000
- Actual Profit = $5,000 - $12,000 = -$7,000
- Lost Profit = $40,000 - (-$7,000) = $40,000 + $7,000 = $47,000
4. Result: Lost Profit = $47,000.
Conclusion: The cancellation resulted in a $47,000 loss compared to the expected profit.
Example 4: Reduced Operating Hours
Scenario: A restaurant has to reduce hours for two weeks due to staff illness.
1. Affected Period: Two Weeks.
2. Known Values:
- Expected Revenue (based on typical sales for the period): $20,000
- Expected Costs (food, reduced staff wages for normal hours): $8,000
- Actual Revenue (from reduced hours): $12,000
- Actual Costs (less food waste, staff wages only for actual hours): $5,500
3. Calculation:
- Expected Profit = $20,000 - $8,000 = $12,000
- Actual Profit = $12,000 - $5,500 = $6,500
- Lost Profit = $12,000 - $6,500 = $5,500
4. Result: Lost Profit = $5,500.
Conclusion: The reduced hours led to $5,500 in lost profit.
Example 5: Product Defect / Recall
Scenario: A company has to stop selling a popular product for a month due to a safety recall.
1. Affected Period: One Month.
2. Known Values:
- Expected Revenue (including the recalled product's contribution): $250,000
- Expected Costs (COGS and variable costs for expected sales): $150,000
- Actual Revenue (excluding recalled product): $180,000
- Actual Costs (COGS and variable costs for actual sales): $100,000
3. Calculation:
- Expected Profit = $250,000 - $150,000 = $100,000
- Actual Profit = $180,000 - $100,000 = $80,000
- Lost Profit = $100,000 - $80,000 = $20,000
4. Result: Lost Profit = $20,000.
Conclusion: The product recall resulted in $20,000 of lost profit.
Example 6: Increased Material Costs
Scenario: A bakery faces unexpected, significant increase in flour cost for one quarter.
1. Affected Period: One Quarter.
2. Known Values:
- Expected Revenue (sales volume unchanged): $80,000
- Expected Costs (normal flour cost + other costs): $40,000
- Actual Revenue (sales volume unchanged): $80,000
- Actual Costs (significantly higher flour cost + other costs): $55,000
3. Calculation:
- Expected Profit = $80,000 - $40,000 = $40,000
- Actual Profit = $80,000 - $55,000 = $25,000
- Lost Profit = $40,000 - $25,000 = $15,000
4. Result: Lost Profit = $15,000.
Conclusion: The increased material costs led to $15,000 in lost profit, even though revenue was stable.
Example 7: Contract Breach
Scenario: A service provider loses a major client due to a contract breach by another party.
1. Affected Period: Duration of the lost contract (e.g., 1 year).
2. Known Values:
- Expected Revenue (including revenue from the lost client): $300,000
- Expected Costs (costs to service all clients, including the lost one): $180,000
- Actual Revenue (excluding revenue from the lost client): $220,000
- Actual Costs (costs to service remaining clients - some fixed costs remain): $140,000
3. Calculation:
- Expected Profit = $300,000 - $180,000 = $120,000
- Actual Profit = $220,000 - $140,000 = $80,000
- Lost Profit = $120,000 - $80,000 = $40,000
4. Result: Lost Profit = $40,000.
Conclusion: The contract loss resulted in an estimated $40,000 of lost profit over the contract period.
Example 8: Equipment Failure
Scenario: A key piece of manufacturing equipment breaks down for several days, halting production.
1. Affected Period: One Week.
2. Known Values:
- Expected Revenue (typical weekly production/sales): $75,000
- Expected Costs (variable costs for full production + fixed costs): $40,000
- Actual Revenue (partial week's production/sales): $25,000
- Actual Costs (reduced variable costs + fixed costs): $30,000
3. Calculation:
- Expected Profit = $75,000 - $40,000 = $35,000
- Actual Profit = $25,000 - $30,000 = -$5,000 (a loss)
- Lost Profit = $35,000 - (-$5,000) = $35,000 + $5,000 = $40,000
4. Result: Lost Profit = $40,000.
Conclusion: The equipment failure resulted in $40,000 of lost profit for the week.
Example 9: Data Breach / Cyber Attack
Scenario: An online retailer experiences a cyber attack, causing their website to be down for 3 days.
1. Affected Period: 3 Days.
2. Known Values:
- Expected Revenue (average daily sales * 3): $15,000
- Expected Costs (variable costs on $15k sales): $5,000
- Actual Revenue (website down): $0
- Actual Costs (some ongoing hosting/service fees): $1,000
3. Calculation:
- Expected Profit = $15,000 - $5,000 = $10,000
- Actual Profit = $0 - $1,000 = -$1,000 (a loss)
- Lost Profit = $10,000 - (-$1,000) = $10,000 + $1,000 = $11,000
4. Result: Lost Profit = $11,000.
Conclusion: The website downtime resulted in $11,000 of lost profit.
Example 10: Delayed Project Completion
Scenario: A construction project is delayed by 2 months, postponing the revenue recognition.
1. Affected Period: 2 Months (delay period).
2. Known Values:
- Expected Revenue (revenue anticipated during these 2 months had project finished on time): $200,000
- Expected Costs (costs associated with that revenue): $120,000
- Actual Revenue (during the delay): $0
- Actual Costs (some residual costs during delay): $10,000
3. Calculation:
- Expected Profit = $200,000 - $120,000 = $80,000
- Actual Profit = $0 - $10,000 = -$10,000
- Lost Profit = $80,000 - (-$10,000) = $80,000 + $10,000 = $90,000
4. Result: Lost Profit = $90,000.
Conclusion: The 2-month delay resulted in $90,000 of lost profit during that specific period.
Frequently Asked Questions about Lost Profits
1. What is 'Lost Profit'?
Lost profit is the difference between the profit a business or individual *would have* earned during a specific period if a disruptive event hadn't occurred (Expected Profit) and the profit they *actually* earned during that same period (Actual Profit).
2. Why would I calculate Lost Profit?
Businesses often calculate lost profits for insurance claims (e.g., business interruption insurance), legal disputes (e.g., breach of contract, negligence), or internal analysis to understand the financial impact of specific events.
3. What are the 'Expected' values?
Expected Revenue and Expected Costs represent the hypothetical financial performance during the affected period, assuming the disruptive event *did not* happen. These are often estimated based on historical performance, market trends, existing contracts, and forecasts.
4. What are the 'Actual' values?
Actual Revenue and Actual Costs are the real financial results recorded during the specific period when the disruptive event occurred.
5. Should I include all costs in the calculation?
Typically, lost profit calculations focus on costs that vary with revenue (variable costs), as these costs would have been incurred to generate the expected, but unearned, revenue. However, fixed costs might also be relevant if they changed due to the event or if the actual scenario resulted in different fixed cost allocation. This calculator uses total costs for simplicity.
6. What time period should I use?
The time period should cover the duration of the disruptive event or its direct financial impact. Consistency is key; the "Expected" and "Actual" figures must cover the exact same timeframe.
7. Is 'Lost Profit' the same as 'Lost Revenue'?
No. Lost revenue is just the top-line sales that weren't earned. Lost profit accounts for the costs that would have been incurred to earn that revenue. Lost profit = Lost Revenue - Costs avoided due to not earning that revenue.
8. Can Lost Profit be negative?
The *calculated* Lost Profit amount itself is usually presented as a positive number representing the loss. However, the calculation (Expected Profit - Actual Profit) can result in a negative number if the actual profit was higher than expected (meaning profit was *gained*, not lost, relative to expectation), or if the actual loss was less severe than the expected loss. The calculator will show the difference.
9. How accurate is this calculator?
This calculator provides a basic model based on four key inputs. Real-world lost profit calculations for legal or insurance purposes are often complex, requiring detailed financial analysis, consideration of mitigating factors, and potentially expert testimony. This tool is for illustrative purposes only.
10. What if Actual Profit is a loss?
If Actual Revenue is less than Actual Costs, the Actual Profit is negative (a loss). The calculator correctly handles this subtraction: `Lost Profit = Expected Profit - (Actual Loss)`, which effectively adds the actual loss amount to the expected profit amount to determine the total negative variance.
