Calculate Business Income for Your Business Insurance
Business income insurance
, also known as business interruption coverage, helps cover lost income and additional expenses when your business is shut down from a covered loss.
Typically, the business income covered is classified as taxable income. This includes any income that results from business activity. For example, say your business’s building is damaged by a fire. Business income insurance can help pay for lost income while your business is shut down. It can also help cover additional expenses you face while shut down. For some, an extra expense may arise if you are forced to move your location after a covered loss.
Business income coverage helps cover:
- Taxes. For example, say your small business suffers damages that force you to temporarily close right before your tax payments are due. Your business income insurance can help cover the costs.
- Payroll. For example, say you have five employees that need to get paid while your operation is temporarily shut down. Business income insurance can help cover these payroll costs.
- Utilities. For example, say you need to pay for utilities for the next two months while your business is being repaired. However, you can’t open your operation until after the repairs are finished. Your business income insurance can step in and help pay for your utility bills.
- Lost profits. For example, say your business suffers a major financial loss after being forced to shut down during the holiday season. Your business income insurance can help cover your lost income.
- Advertising. For example, say you owe advertising payments to the company that built your new advertising campaign. However, you recently had to close down your operation to repair damages. Your business income insurance can help cover these advertising costs until you are able to open your business up and make a profit again. Advertising costs may also arise if you must move your business’s location after enduring a covered loss.
- Mortgages or rent. For example, say you rent the building your restaurant is located in. After a fire destroys parts of your restaurant, it needs to be rebuilt. This is expected to take weeks. Your business income insurance can help cover the costs associated.
Once you know what’s covered by business income insurance, you will want to learn to calculate your overall business income. Calculating your business income is important for your business owner’s policy
(BOP). It helps cover payments, revenue, or property damage in the event of a covered loss.
How to Calculate Business Income for Insurance
Calculating your business income starts with reporting your gross receipts or sales. This includes all items and services you sell at your business. For example, say you sell computer equipment. Every item you sell would be included in this starting calculation.
If your business makes or buys goods to sell and maintain inventory, you should deduct the cost of goods sold from your revenues. You should do this when computing your gross profit from your business.
Keep in mind that any income you receive that relates to your business is considered business income. That said your business’s sales will constitute most of your business’s income.
To start your calculation follow these steps:
- Calculate your total revenue.
- Subtract your business’s expenses and operating costs from your total revenue. This calculates your business’s earnings before tax.
- Deduct taxes from this amount to find you business’s net income. Your net income will be your business income.
The equation for business income is: Business income = revenue - expenses
What Will My Business Income Insurance Cost?
Insurance Services Office (ISO) worksheets can be helpful when calculating business income. Following these worksheets can help you:
- Calculate how much income your business generated in the previous 12-month period.
- Estimate your income for the future 12-month period.
You can make your projections by adjusting your 12-month historical figures to reflect any changes you expect to see over the coming year. If you expect your sales to increase by 10 percent, you can increase your income projection accordingly.
Once you finish your 12-month income projection, you can estimate the period of restoration. To protect your business, estimates should be based on a worst-case scenario.
An accurate business income insurance cost is based off of your own 12-month projection. However, it is important to invoke the help of an expert Hartford agent to properly calculate this projection.
For help calculating your business income contact The Hartford today.
By: The Hartford