Calculating a Claim For Loss of Profits
Depending on the type of insurance policy that you hold you may be eligible to make a claim for loss of profits apart from the damages incurred in the fire or any other factor that your business is insured against. However, in order to file such a claim you will have to start by calculating the loss of profit from the date of fire or flooding, which can be a confusing and daunting task. So here are the step by step instructions on tacking this calculation:
Derek Rogers is a freelance writer who represents a number of UK businesses. For Consequential Loss and Business Interruption Claims, he recommends Morgan Clark.
Step One: Gross Profit
If you want to calculate the loss of profit, you will have to start by assessing the gross profit which can then be multiplied by short of sale to get the loss of profit in the disturbance period.
In order to calculate the gross profits, add the net profit of the previous year to the insured standings and the various charges of last year; the sum of these should give you the gross profit.
Step Two: Gross Profit ratio
Now, calculate the Gross Profit ratio by dividing the gross profit by sale of previous year and multiplying the resultant figure by 100
So, GP Ratio= Gross Profit/ Sales of previous Year X 100
Step Three: Shortage in Sale
In order to calculate the shortage in sale, you will have to determine the actual sale of the same period in the previous year. An increase in sales trends have to be added to this figure. Subtract the actual sales of the dislocation period from the sum of the two previous figures to get the shortage in sale.
Shortage in Sale = Actual Sale of the same period in the previous year
+ Any increase in sales trends
- The actual sales of the dislocation period.
Step Four: Loss Of Profit:
The loss of profit is equal to the shortage of sale multiplied by the gross profit ratio divided by 100.
Loss of profit= Shortage of Sale x G.P Ratio/100
To determine the total amount of claim for loss of profit you can add increase in the cost of working to the loss of gross profit and deduct any saving in standing charges from this figure.
In case of loss of profit calculation, insured standing charges would entail all expenses mentioned in the insurance policy of loss of profit. For instance, expenses such as advertising, salaries of permanent staff, auditor's fees, traveling expenses to the temporary premises, rent, taxes, interest on loans, wages of skilled workers, other expenses which do not exceed 5% of the described standing expenditure can be added.
If you feel that you cannot handle the calculation, you can enlist the help of your auditor to help you calculate the claim for loss of profit. It is imperative that you have all the relevant documents that prove your claim.
Apart from this, you may also want to consider getting in touch with an insurance assessor; the insurance companies will have their employees to assess the damage and to verify the veracity of your claim. So in case of certain tricky situations, it is in your best interest to get an expert to work on your side as well. The insurance assessor will be able to point out anomalies in your claims, he will go through the policy meticulously looking for extra coverage that you can get.
An insurance assessor may also be able to help you in case your claim has been denied and he may be able to get into a renegotiation with the insurance company.
