Severe water damage caused by a hurricane. Smoke damage caused by a fire in a neighbouring business. Theft and vandalism caused by burglars. Any of these examples interrupts business, which in turn causes a loss of future earnings, or gross profit. To calculate business interruption gross profit---or how much you would have made had no interruption occurred---you'll need to review your income statement to punch out a figure.
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Decide whether you want to focus on quarterly or yearly figures.
Write down your gross sales for the time period you've chosen. Make sure all numbers used from this step on reflect the same time period.
Write down the total value of adjustments (for example, returns, allowances and discounts) made.
Calculate net sales. Subtract the gross sales figure in Step 2 from the adjustment figure in Step 3. The equation looks like this: Net sales = gross sales -- adjustments. Write the net sales figure down.
Note all other streams of income related to the business that would be lost if operations were interrupted. This includes rent, interest and service fees. Add all of these amounts together and write the total amount down as "other income."
Calculate total revenue. Add the net sales amount from Step 4 to the other income amount from Step 5. The equation looks like this: Total revenue = net sales + other income. Write down the total revenue figure.
Calculate the cost of goods sold, or COGS. The COGS includes the cost of items or labour such as materials, purchases and assembly needed to build up your inventory. Add all of these costs together to get your COGS figure.
Calculate gross profit by subtracting the total revenue figure in Step 6 from the COGS figure in Step 7. The equation looks like this: Gross profit = Total revenues -- COGS. This is your current gross profit amount.
Add up all of your discontinued expenses, or expenses that will stop if the business is interrupted. These expenses include rent, air conditioning, electricity, advertising and maintenance costs. Write the total down.
Calculate the business interruption gross profit by subtracting the current gross profit amount in Step 8 from the discontinued expenses amount in Step 9. The equation looks like this: Business interruption gross profit = current gross profit -- discontinued expenses.
Tips and warnings
- For best accuracy, let a certified public accountant calculate business interruption.
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- "Financial Management: Theory and Practice, 12th Edition"; Eugune F. Brigham and Michael C. Ehrhart; 2008
- "Cost Accounting: A Managerial Emphasis, 12th Edition"; Charles T. Horngren, Srikant M. Datar and George Foster; 2006
- Bajaj Allianz General Insurance: Business Interruption
- Insuropedia.com: Declared Value on Gross Profit
- AllBusiness.com: Common Pitfalls in Business Interruption Insurance