Newsletter: B(Prepared!)

"Business Income Made Simple"
   By Robert M. Swift



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BUSINESS INCOME WORKSHEETS

The following questions and answers are for your information. The content is believed to be accurate, but it is not guaranteed.

Why do I need to complete a Business Income worksheet?
It is used to estimate the net profits plus continuing expenses (Business Income) that a business would have realized had no loss occurred. It is required if the policy provides agreed amount.

What is agreed amount?
The underwriter agrees to insure the loss of income for the amount that is being requested by the insured.

If I have agreed amount, why do I have a co-insurance percentage on the worksheet?
Our worksheets include the co-insurance percentage because it is the percent of a year that is being calculated. It is used by the underwriter to price the insurance policy.

Why is the Extra Expenses calculation important?
This important calculation is used to reimburse businesses for expenses incurred because of a disaster. This maintains your market share and customer base, and reduces the duration and severity of a loss.

How often do I review my BI insurance and complete a new BI/EE worksheet?
Every year or as your business changes, otherwise you significantly increase the risk of under-insurance. A good time to do it is when the policy is up for renewal.

Do I have to complete every line?
No. Only fill in the rows that are appropriate for the business.

What if I get a negative number?
You did not include all income and/or subtracted too much of your expenses. Follow the instructions exactly.

How do I choose my period of restoration?
Use the Contingency Plan to determine this. If there is no plan, try to estimate how long it will take to recover operations and market share, as well as how long your customers will wait for you to bring your product or service to market.

Why do I subtract interest income?
This is not income from operations. The insurance contract states this in its definition of Business Income.

May I subtract depreciation?
No. This is usually a Continuing Expense. There has been a lot of discussion over the last century about this, and the insurance industry has made not deducting depreciation a standard practice.

What are Discontinuing Expenses?
These are the Operating Expenses that discontinue when the business is shutdown. Examples include, materials and supplies, but also sometimes include utilities, subcontract costs, maintenance, cafeteria, etc.

What are Extra Expenses?
These are the expenses incurred in addition to the normal operating expenses. For example, the rent is usually $100/sq. ft. and now it is $125/sq. ft. Therefore, $25/sq.ft. is the Extra Expense. It would also include additional overtime not usually paid, increased transportation costs, etc.

What is inventory at sales price?
This is for manufacturer’s finished stock only, and represents the sales price less discounts and allowances. This is not Business Income coverage, it is property coverage.

Why doesn’t my agent do this for me?
It is not their job and they have not been trained to do this. The business owner is the one who has to make the business decisions regarding recovery strategy and plans.

What if I am operating at a loss?
Make sure the coverage limit pays for Continuing Expenses. Then subtract the loss from the Continuing Expenses. For example, $10,000 Continuing Expenses, $2,000 loss = $8,000 BI limit.

What if I have no income?
Buy an insurance policy specifically for this business, such as non-profit, R&D, start-up, coming-out-of-bankruptcy, etc. It is imperative to make sure the policy will respond properly, and then the calculation is for whatever the Continuing Expenses would be.

What if I am a R&D company?
Make certain the policy is written to pay "lost or deferred milestone payments", and Continuing Expenses, including payroll. The standard Business Income policy will not respond because there is no operating income, so there is no loss of income.

How does a municipality calculate their exposure?
Determine the revenue-generating services that would be discontinued, and for how long. These organizations need a great deal of Contingent Business Income coverage for the major employers and consumers of services in the municipality.

Are mortgage payments part of Continuing Expenses? I read somewhere only the interest portion is a covered expense.
All financial obligations are a Continuing Expense. A mortgage is a financial contract obligating the mortgagee to pay a monthly amount to the mortgagor, with the property being used as collateral for the loan. The whole amount is due or the property can be foreclosed upon and lost. This is a normal business expense paid out of income and should be part of the Business Income calculation.

Where do I add payroll into the BI calculation that I want to cover?
Since you are using total sales, the payroll amount is already included. So, if payroll is not subtracted, it is still included. The only payroll calculation that has to be made is to subtract the amount of payroll you do not want to cover. For example, if you had $100,000 in sales with $20,000 in payroll, you would use the $100,000 amount that includes payroll or the $80,000 amount if you exclude payroll.

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