If the thought of filling out business income worksheets makes you and your clients cringe, read on for advice on how to remove some pain from the process.
Start with your client’s Profit & Loss (P&L) statement. All line items in the P&L can be used in the worksheet. There’s absolutely no guessing on what to add or subtract. All you do is assign variability percentages to each line item.
Figuring out the variable and fixed expenses
Fixed expenses do not fluctuate much as revenue levels change and would be expected to continue even if operations ceased. They are not directly tied to revenue generation; however, they are necessary to maintain operations. Some examples of fixed expenses are salaries, depreciation, property taxes, rent and, of course, insurance premiums.
Then there are variable expenses. These expenses tend to fluctuate with revenues and would not be expected to continue if the organization were to cease operations. They are directly linked to the generation of revenue. Examples include direct labor, commissions, and (to some degree) utilities. When generating the BI Worksheet, this is where much of the time and effort will be spent. The goal is to quantify the variability percentage based on the tendency of that expense to fluctuate with the company’s revenues.
Tap financial experts
If questions remain, just leverage available resources. Many, if not all carriers, have financial experts on staff. These experts will work directly with your clients to come up with a mutually agreed upon BI worksheet.
BI values vs. business interruption exposure
One important thing to remember is to report business income value, not business interruption exposure. What’s the difference? Business income value represents an annual baseline reference amount. The business interruption exposure is an amount that reflects the financial loss an organization could incur in a specific loss event. This exposure considers interdependency impacts on other locations, recovery time, mitigation, makeup capabilities and other factors. For more information, read “Don’t Confuse Business Income Values with Business Interruption Exposure,” a 2019 enVision article.
The BI reporting process can be easier and more effective when:
- BI exposures and BI values are understood as two different measurements. Remember: BI value represents an annual baseline amount used for valuation purposes.
- The process includes a key client accounting representative who understands essential BI value reporting concepts.
- The P&L statement approach is applied for efficiency and understanding.
- AFM resources are leveraged for additional assistance; these include Business Risk Consultants, your account team and the AFM Training Center, which offers brokers and clients a free one-hour online class called “Reporting Accurate Values.”