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Business Interruption: How to Calculate Gross Profit
Establishing an accurate gross profit sum insured with your Client Director/ Broker is essential to the correct operating of a business interruption cover.
We have used this calculation formula for many years which has proved very helpful to our clients and whilst it will not apply to all situations it will assist in most cases. Variations for specific situations will form part of your discussions with our Client Directors.
Turnover, work in progress, closing stock and opening stock are easily determined in accordance with normal accountancy methods.
‘Uninsured working expenses’ are costs or ‘specified expenses’ that vary directly with the level of trading, i.e. they will decrease in direct proportion to the turnover in the event of a business interruption. As these costs will no longer be incurred as the turnover reduces, there is no need to insure them.
Uninsured working expenses are generally shown as:
- Cost of purchase
- Packaging & freight costs
- Bad debts
In the past Wages or at least a proportion of them were viewed as an uninsured working expense however current practice encourages policyholders to insure wages in full. There will be exceptions to this practice and again our Client Directors will fully discuss this situation before making final recommendations.