What is loss of profit?

Loss of profit refers to the loss of earnings or profits that a person or business loses due to a particular situation. It is generally used in the legal or insurance field to calculate the amount of compensation that one party must pay to another for an economic loss.

For example, if a company suffers damage to its machinery and is forced to close temporarily, it will lose revenue for the duration of the repair. In this case, the business can claim compensation for lost profits, i.e. the amount of money it lost during the period when it was unable to operate.

The calculation of lost profits can vary depending on the case and jurisdiction, but is generally based on the past and projected income of the affected person or business, as well as any additional costs incurred as a result of the situation that caused the loss of income.

Requirements for loss of profit

• The loss of income must be a direct consequence of the event or situation that caused the damage. For example, if a person suffers a traffic accident and is unable to work for a month, the loss of income during that period can be considered as loss of earnings if it can be proven that the accident was the direct cause of the inability to work.
• The loss of income must be quantifiable. That is, it must be possible to estimate with some precision the amount of income that was lost due to the situation that caused the injury. For this purpose, accounting records, financial projections and other evidence can be used to determine the economic impact of the event.
• The party claiming compensation must have taken reasonable steps to mitigate the damage. For example, if a company suffers a fire in its warehouse and loses merchandise, it would be expected to take steps to minimise the loss, such as securing the area, hiring additional security, and so on. If reasonable measures have not been taken, the compensation for loss of profits could be reduced.

Methods for calculating lost profits

There are different methods for calculating lost profits, but in general, they all seek to determine the amount of profits lost as a result of the event that caused the damage. Some of the most common methods are described below:

1. Net profit method: This method is based on the difference between the company's income and expenses during a specific period of time. It averages the net income that the company earned in a period prior to the event that caused the damage, and compares it to the income that would have been earned during the period in which the loss of income occurred.
2. Gross profit method: This method is based on the gross profit margin of the company. It calculates the average gross profit that the company earned in a period prior to the event that caused the damage, and compares it to the gross profit that would have been earned during the period in which the revenue loss occurred.
3. Rule-of-thumb method: This method is based on a rough estimate of lost profits. It is used when it is not possible to obtain accurate data on the company's revenues and expenses. In general, the loss of income is estimated to correspond to a certain percentage of the company's gross income.
4. Income comparison method: This method is based on a comparison of the company's income before and after the event that caused the damage. It compares the average revenue that the company earned in a period prior to the event with the revenue that would have been earned during the period in which the loss of revenue occurred.

When can lost profits be claimed?

Lost profits can be claimed in different situations, provided that certain requirements are met. Some of the most common situations in which lost profits can be claimed are:

• Personal injury: If a person suffers a personal injury, such as a traffic accident, a workplace injury or a medical error, and as a result is unable to work or earn money for a period of time, he or she can claim loss of earnings corresponding to the salary or income that he or she lost during that period.
• Property damage: If a business or individual suffers property damage to their property as a result of fire, natural disaster, theft, etc., and as a result is forced to temporarily close or reduce production, they can claim loss of earnings corresponding to the earnings they lost during that period.
• Breach of contract: If one party breaches a contract and as a result, the other party suffers an economic loss, it can claim lost profits corresponding to the amount it lost as a result of the breach.