There are many ways to format a business interruption calculation for an insurance claim. Each method is unique and there isn’t a “one size fits all” method that works for every business income loss. However, there is one method that I use repeatedly, which is referred to as the “Three Column Approach.” In the graphic below, I’ve included a simplified example of what this type of business interruption calculation looks like. Being the accounting geek that I am, it’s my pleasure to walk you through this simplified version of a “Three Column Approach” calculation. Let’s get started.
The first column contains the projected, “without incident” values. These are the revenue and expenses that the business would have expected if the interruption had not occurred. The second column contains the actual values that were recorded. The third column is calculated by subtracting the actual values from the projected values.
In this example, you can see that sales were down by $200,000. Correspondingly, variable expenses were down $120,000. These values are what would normally be referred to as saved, or non-continuing, expenses and are deducted from the lost revenue. The fixed expenses were not affected and the end result was an $80,000 loss of net income. Again, this example is overly simplified for illustration purposes and a real set of loss schedules would contain many sub-schedules and detailed calculations that are not shown here.
There are some definite advantages to using this type of presentation. First, it clearly defines projected and actual values, side by side, and easily allows the reader to see the specific areas of impact. Second, this method identifies every category from the profit and loss statement. No elements of the loss can fall through the cracks by simply showing either the saved expenses or just the continuing expenses, which is common in many claim presentations. Finally, the “Three Column Approach” provides a mechanism to potentially identify extra expenses that were not captured elsewhere.
For example, if fixed expenses had been projected at $60,000 and they were actually $75,000, there may be extra expenses that were captured in these accounts. If not, then perhaps the projected value is inaccurate and needs to be modified. Regardless, all revenues and expenses will be considered when using the “Three Column Approach.”
There is no one “right” method to prepare a business interruption calculation. An experienced and credentialed forensic accountant can guide you to the method that will work best for your specific situation.
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