Joe Epps 2014-09-03 01:24:41
Projecting Revenues (or Is It Sales?) The term “A rose by any other name … ” applies to revenues and sales. Even after almost 40 years in the accounting profession I still do not know why attorneys and accountants have revenues while taco shops have sales. I suppose that, at least for attorneys and accountants, having sales is beneath their dignity while they really like having revenues. Maybe revenues spend better than sales. And, revenue just seems to sound more dignified. Maybe they could have the client drop the sales money into a box on their way out and that way no one would know they made a sale instead of generating revenue? In this article I will do my very best to refer to revenues when appropriate and sales when less dignity is required even though I have no problem accepting accounting sales money instead of revenue money as long as the check clears the bank. No matter what you call it, a critical element for any business is the money coming in the door whether we call that money revenues or sales. The projection of revenues or sales is a critical element in many types of litigation. Examples include when the issue being litigated involves a business value, patent infringement or the determination of economic damages from lost profits. While it may also be necessary to project other factors such as cost of sales and operating expenses, the determination damages most often starts with the projection of revenues. There is no one way or even a best way to project sales. The specific case determines the most appropriate method to apply. The method used will vary depending on many factors and may be different for two businesses operating in the same industry. For example, assume that there are two sandwich shops (we will call them Business A and Business B) in the same city. Both businesses have been operating for many years. However, Business A has seen a new competing sandwich shop open across the street about three months ago. Business B, on the other hand, has had no new competition for years. When making the projection for Business A, the sales experience of the business over the past three months is critical to the projection of sales. This is because the new competition may have had a direct and identifiable impact on the sales of Business A. Because of this, the recent sales experience of the business is much more significant than the prior history or sales trend for Business A. In all likelihood, sales of Business A would have decreased due to the new competition and that impact would need to be factored into the sales projection. Of course, if Business A had seen a close competitor close down three months ago, the focus would still be on the recent sales experience with the likelihood being that sales would have increased as a result. Again, this would need to be factored into the sales projection. The method of projecting sales of Business B would be different from the projection method for Business A. In the case of Business B, there are no known changes in the competitive situation. Therefore, the sales projection would likely be influenced by looking at a longer term historical sales trend for the business. Exactly how that projection would be developed would depend on the specifics of the situation. The two examples presented above provide a glimpse into what can be a sometimes complicated and always thoughtful development of a sales (or revenue) projection. Since sales are a key element in the determination of economic damages, your damages expert should be able to explain specifically why the method applied was the most appropriate for the specific case. I suggest that the attorney make sufficient inquiries of the expert to understand the basis for the sales projection. If the expert cannot clearly explain the method and why it is appropriate, they may not be persuasive at trial. By the same token, when deposing an opposing damages expert, find out if he or she can make both the method applied and the reason for selection of that method clear. If they cannot, have fun! Joe Epps is a CPA and CFE with over 30 years of experience in forensic accounting. His litigation support experience includes contract disputes, anti-trust, economic damages, fraud investigations, business valuation and intellectual property litigation. Joe is currently president of Epps Forensic Consulting and teaches a graduate course on forensic accounting at Arizona State University. For more information, please call (480) 595-0943 or visit www.eppsforensics.com.
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