Wegmann Dazet Senior Manager Anita Zimmer, CPA, ABV, CFF gives some advice to business owners to be prepared: a hurricane busy season may lead to a business interruption claim.
In the public accounting world, we refer to the period of February through April as busy season. With the lingering disturbance along the Gulf Coast bringing us rain this week, it reminded me to be prepared for the approaching Hurricane Busy Season which occurs in August-September, while hoping it will be a slow one.
You likely already take steps to protect your physical work location (office and other buildings). But is the financial side of your business prepared for a weather-related business interruption event? Read this article from the National Association of Insurance Commissioners for general information on business interruption insurance policies.
The biggest gap I see in the financial preparation of a business is the accounting not being up to date monthly. Business Interruption (BI) claims do not solely rely on annual accounting records to calculate the business losses. In fact, the insurance company wants to see how your revenues and related profits were performing immediately prior to the loss event; this information is used to calculate the BI loss in the event you are unable to operate due to physical damages to the property. Work with your internal accountant and your public accountant to maintain monthly up to date accounting records, all year long.
Do you have a plan to protect your financial records? Work with your IT support to ensure that the accounting software is properly backed up and that you can access it upon returning to the office. You should also have a plan to access the software in the event of major damage to the property or long-term evacuation. Implement and test this plan now. Aside from potentially hindering your ability to operate, no BI claim work can begin until accounting records are accessible.
For any potential business interruption event, be prepared to provide documentation related to income and expenses, including payroll. The historical documents can be assembled now into one electronic file folder for easy access if needed. Add updated reports to this folder as part of the monthly accounting procedures. Typical documentation that insurers request to substantiate a BI claim include:
‒ Historical sales data by month.
‒ Monthly and annual profit and loss statements
‒ Monthly revenue journals, and forecasts if prepared
‒ Inventory reports and manufacturing cost statements, if applicable
‒ Monthly payroll data by person and/or department
‒ Prior year tax returns
What to do after a storm if you have damages that prevent normal operations?
In addition to lost net income, the business interruption insurance pays continuing normal operating expenses incurred, including payroll. “Continuing” is a key point here. If you have the funds, pay regular payroll and other operating expenses. If employees work overtime to help with cleanup and repairs, that will be paid by insurance also as an extra expense; therefore, document those overtime hours with a separate payroll code. If you do not pay employees, then the payroll expense is not “continuing” and may be difficult to get paid as part of the BI claim, even if you plan to pay employees when you receive the BI funds. Request an advance from the insurance company to assist with your cash flow and allow you to pay bills and payroll. Your insurance company will still need some basic documents to estimate the amount of the advance. Having your accounting records in order will expedite handling of the claim and additional advances while the claim is still in process.
Set up a separate general ledger account code to track expenses related to hurricane repairs and other related expenses. Keep a copy of bills and receipts for those expenses either in a virtual or physical file folder for easy access. You will need to provide these to the insurance company. Again, be prepared: a hurricane busy season may lead to a business interruption claim.
Once the BI claim/event happens, the team at Wegmann Dazet has vast experience to assist you in:
- Analyzing and reviewing your historical operating results
- Comparing your company’s operating results to industry data and determining the event’s effect on earnings
- Projecting your performance had the event not occurred and compare to actual performance
- Calculating lost net income and continuing expenses attributable to the event
- Tracking any extra expenses incurred which are solely attributable to the event
- Working directly with the insurance adjuster and his accountant reviewing the claim
And don’t forget, even when there is no imminent storm threat, what about other catastrophes? Commercial building collapses, Gulf oil spills, city drainage work and road construction blockages…. these all can affect a business’s income. We have seen it all! As a business owner, you should always be ready. Prepare now for that potential business interruption claim!
Contact Anita and the team at Wegmann Dazet to learn more. Remember, be prepared: a hurricane busy season may lead to a business interruption claim.
- It’s Busy Season Again – Hurricane Busy Season! - July 15, 2022
- What to Know about Business Interruption Insurance! - September 28, 2021