Many businesses purchase loss-of-profit insurance, also called “business interruption” insurance, to cover a loss of ability to operate due to circumstances outside of the business’s control, such as a natural disaster. Business interruption insurance based on gross profit reimburses the business for money lost based on lack of operations for a specified period of time. The start and end date of insurance coverage as well as the criteria for receiving coverage are set forth in the insurance policy. Calculating gross profit for insurance coverage will differ some from business to business depending on the details set forth in the policy, but the theory behind the calculation is the same regardless.
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Things you need
- Income statement
Obtain the income statement for the last full operating month and locate the net profit amount.
Review each individual expense line item on the income statement to identify costs of operation that are not directly related to production, also referred to as “standing charges.” For example, office rent is due whether the business is in operation or not, and the price does not fluctuate based on production, whereas production worker salaries would cease when production ceased.
Add each standing expense identified in Step 2 to the net profit obtained in Step 1 to obtain gross profit, or the company’s loss from lack of operations.
Tips and warnings
- Insurance companies may take an average of six months or a year of income statements to determine an applicable gross profit.
- If your business has been on a steady incline in profit, show that trend to the insurance company and see if the insurance company representative will factor the monthly percentage increase in profit into the calculation for gross profit.
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