Gross Profit

The accounting definition for gross profit is the difference between revenue and the cost of making a product or providing a service, before deducting payroll, overheads, taxation, and interest payments.

A gross profits insurance policy pays for the rate of gross profit times the shortage in turnover plus the increase cost of working less any savings in standing charges resulting from the damage.

Turnover is the money paid or payable to you for goods sold and delivered and for services rendered in the course of business at the premises.

Cost of working is the additional costs necessary for the sole purpose of avoiding or diminishing the reduction in "turnover".

Standing charges include:

  • Advertising
  • Auditors fees
  • Data processing under contract
  • Delivery and other services under contract
  • Depreciation
  • Directors fees
  • Donations and subscriptions
  • Expenses of branch or local offices
  • Insurance premiums
  • Interest on bonds,mortgages, loans and other borrowed capital
  • Electricity, heating, air conditioning and power
  • Maintenance of buildings and machinery
  • Printing, postage and stationery
  • Rent
  • Royalties
  • Salaries and wages to executives, foremen and other key personnel whose services would still be required during any period of interruption.
  • Taxes
  • Telephone, telegraph and telecommunications

What is not included in standing charges:

  • Depreciation of stock
  • Bad debts
  • Wages and salaries for other then permanent staff, wages to the foremen and key personnel whose services would be be dispensed with should the business be interfered with or interrupted.

When you consider this gross profit insurance value you need to be aware that there are penalties if you insured to less then 100% - this is called co-insurance.

Another key area to consider is the length of time you need to get back to the full profits level. Most insurance companies will offer a 12 month policy. Some will go as far as 18 months. You need to consider what your business will need to be fully restored and profit back to the level it was just before the loss occurred.

There is always a component of due diligence in this type of insurance. The gross profits form requires that you, the insured, must do everything reasonably practicable to minimize or check any interruption of or interference with the business or to avoid or diminish the loss. This is a gentler demand than you will find under the gross earnings form of business interruption.

You need to carefully consider your situation when choosing which form of business interruption coverage you are buying. Talk this over with your agent or broker.