In our last blog about the local economy, we explored the impact in regards to building claims. In this installment we are going to talk about the importance of understanding the local economy when preparing a business interruption claim.
Businesses are impacted by the local and global economy every day. In today’s ever connected world, something across the planet could greatly change the way a small business on Main Street operates in a matter of days. While fully understanding a business’s place in the local and global economies could take two full college semesters to explain, let us look at the economy’s effect on the sales of a business.
The first step in measuring any business interruption claim is measuring the lost sales of the business. This is somewhat counterintuitive when you think about having to measure the sales the business would have done BUT FOR the loss. How can anyone know what the business would have done if the loss hadn’t happened?
For any business it is important that their public adjuster, insurance company’s adjuster or forensic accountant understands the business, its customers, its product and any other variable that affects the business’ revenue stream. Let’s look at a restaurant on Nantucket. If the insured suffers a loss in January or February, the lost sales projection during that period is going to be a lot different than July or August. But do you know why July 2018 would be very different from July 2016? In July 2018, the 4th of July fell on a Wednesday, and in July 2016 the 4th fell on a Monday. You might think that the holiday falling on a Monday would be preferential, but when the holiday falls in the middle of the week, vacationers to the island take the entire week as a holiday vs. only taking the weekend when it falls on a Monday.
Let’s look at a good example of micro economy – Nantucket. Most Nantucket businesses go dormant after Labor Day and come to life again in May. Some businesses make enough money between Memorial Day and Labor Day to sustain themselves the entire year. This ebb and flow of their sales is critical in understanding how to project a loss. At the same time, however, you have to remember other factors that are going to affect sales. How many Saturdays and Sundays are there from Memorial Day to Labor Day? How late and how early do the holidays fall? Is the 4th of July on a weekend or in the middle of the week? What’s the weather like? And what impact does COVID really have on this business’ sales? All of these are factors that you need to understand before you can begin to project lost sales. It’s important to note that measuring a business interruption claim for a restaurant on Nantucket versus a restaurant in Boston could be very different just based on location, even if all the answers to the above questions are the same.
There are hundreds of other factors you should also be considering when putting together a projection of sales. It’s important to talk to the business owner and management. These are the people who are in the trenches every day. They know if foot traffic is up or down. They know that September is a better month for them than July. It’s important to interview and then review the analysis with these people for the insight that they have to the business.
Look out for Part 3 of this series, which will focus on the expenses of business interruption claims.