Calculating Gross Profit
Nothing will replace the value that a professional will be able to bring during the estimations of the Gross Profit sum insured. Here are some guidance notes if you do want more clarity on how insurance brokers help their clients work through their sum insured calculations.
For insurance purposes “gross profit” is the amount by which:
The of the amount of the turnover and the amount of the closing stock and work in progress shall exceed the amount of the opening stock and work in progress and the amount of the Uninsured Working Expenses
Note: The amounts of the opening and closing stocks and work in progress shall be arrived at, in accordance with the normal accountancy methods of the Insured due provision being made for depreciation.
Source: Allianz policy wording, business Interruption Estimated Gross Profit
“Uninsured working expenses” are:
Uninsured working expenses are costs that you may choose to remove from the overall sum insured. These would be costs that you expect will not need to be paid following a loss. These are also known as ‘Specified Working Expenses’ or ‘Uninsured Variable Charges’.
More uninsured working expenses means that your declared Gross Profit sum insured will be lower which will result in a lower premium, providing this section of cover isn’t one that is given ‘free’.
CAUTION: you buy insurance for peace of mind. If you have a claim and you have omitted important items from your calculations this is likely to create an extremely stressful situation.
If you are in doubt, do not remove the expense from your calculation
Some examples of uninsured working expenses are:
- Raw materials
- Bad debts
- Packaging (if you are not producing goods, you will not need packaging)
- A portion of your electricity or gas bill (example, if you are a factory and you will not be producing goods this is likely to have a big impact on your bill.)
- Casual staff – Not to be confused with directly employed staff which you will need when your site is back up and running.
Warning: Staff are one of the main ingredients to a company’s identity and success. You may be in a position to make all your direct staff redundant but please consider when you are up and running, how long it would take to train new staff up to an adequate level. Our recommendation is to NOT exclude direct wages from your calculations.
For this example, we will use a fictitious company called Movo Manufacturing Ltd
The annual accounts of Movo Manufacturing Ltd show an annual turnover of £1,000,000.
The current stock valuation is £100,000 and work in progress is £50,000.
The accounts show a stock valuation of £75,000, a work in progress valuation at the start of the financial period of £25,000 and purchases/cost of sales
uninsured working expenses are based on £100,000.
The gross profit sum insured for Movo Manufacturing Ltd would be as follows:
Closing stock and work in progress £150,000
Total £1,150,000 (a)
Opening stock and work in progress £100,000
Uninsured working expenses £100,000
Total £200,000 (b)
Gross profit (a) less (b) = £850,000
Probably the biggest area of deficiency that we come across at Movo Insurance is the length of time that a business estimates that it will take to recover following on from a major loss. This is referred to as the ‘Indemnity Period’.
At Movo Insurance, we have experience of dealing with major losses and unsurprisingly, things always take longer than expected. In some cases, we have seen that discussions between insurers/loss adjuster and clients, planning issues and negotiating time, mean that it can take 9 months before the first brick is even laid.
A 12-month indemnity period is likely to be deficient although the choice remains with you, the client.
Why do clients opt for low indemnity periods?
For every additional year that you add to the indemnity period, the sum insured will double. That does not always equate to a doubling of premium but it will not be far off.
Financial pressures often guide insurance demands but please bear in mind that you should estimate accurately the amount of time it will take you to get your business back up and running.
Disaster Recovery Plan:
There is one non-insurance related item which can make a big difference to your Business Interruption Insurance program and that is a good Disaster Recovery Plan (DRP). This is the planning process for the eventuality of a large loss. Getting going from day one rather than having to start the planning process after a loss will make a big difference.
You should also consider the anticipated growth of the business over both the policy period and increase the sum insured in line with the anticipated growth. Gross profit is not adjustable and therefore you need to have as an accurate a figure as possible at the beginning of your policy.
What does our calculator not do?
- It does not replace the advices you should seek from a professional adviser and should not be relied upon without consultation.
- To have a full and adequate Business Interruption Insurance protection you should consider other items including Increased Cost of Working as well as potentially Additional Increased Cost of Working.
- Our calculator is designed to be simple and therefore can only cater for ‘set’ amounts of projected growth. If your projected growth exceeds 15% please contact us so we can help with a manual calculation.