Business calculations made easy by Olivier van Lieshout Global Facts wwwglobalfactsnl 2 Cigar Box method CB1 cost price for one single product CB2 cost price for a range of products CB3 cost price monitoring on a daily basis ID: 910288
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Slide1
1
The Cigar Box® Method
Business calculations made easy
by Olivier van Lieshout
Global Facts
www.globalfacts.nl
Slide22
Cigar Box method
CB1: cost price for one single product
CB2: cost price for a range of products
CB3: cost price monitoring on a daily basis
CB4: investment analysis
CB5: value chain analysis
CB6: customer satisfaction analysis
CB7: pipeline sales leads analysis
Visit:
www.globalfacts.nl
for free downloads.
Slide3Cigar Box applications worldwide > 100 users
3
Bakery jobs
Slide44
Part 1 – Understanding Retailers
The two types of value chains
Value Additions options after the harvest.
PMC selection
Understand the retailer
Importance of risk mitigation by channel integration
Slide5Horizontal and Vertical Value chains
07-Jun-16
5
Slide6F&V Value Addition Options
Fresh
Fresh-cut
(Semi)Processed
Drying
Freezing
Heating
Pickling
Sweetening
Salting
Additives
Raw material
Fresh
Fresh-cut
(Semi-) Processed
Harvest
Harvest
Harvest
Clean
Clean
Clean
Select
Cut
Cut
Mix
Treat
Pack
Pack
Pack
Ship
Ship
Ship
A-grade
B-grade
C-grade
07-Jun-16
6
Slide7Selecting Profitable PMC’s
Fresh, fresh-cut, or (semi)processed products?Local, regional, or export market?
PMC
Fresh
Fresh-cut
(Semi) Processed
Local
Regional
Export
Is it profitable?
07-Jun-16
7
PMC
Fresh
Fresh-cut
(Semi) Processed
Local
Easy
Not easy
Regional
Difficult
Export
Slide8Who makes the profit?
Input supplier?
Farmer?
Trader?
Packhouse?
Processor?
Distributor?
Retailer?
07-Jun-16
8
Slide9Value Added in F&V Chain
07-Jun-16
9
Slide10Retail power in many markets
07-Jun-16
10
Slide11Understanding Retailers
07-Jun-16
11
Slide12Integration reduces risks
No integration
Strong integration
07-Jun-16
12
Slide13Shifting from open market sourcing to dedicated supply chains
07-Jun-16
13
Slide14What creates VALUE?
Profit!
14
Slide1515
Part 2
How to make profit?
There are only five profit parameters.
Differentiate variable and fixed costs.
Define margin and contribution.
Two profit formulas
Slide1616
How to calculate profit ?
P = price
q = quantity sold
VC = variable cost (raw materials, processing, packaging)
FC = fixed cost (depreciation, interest, overhead, marketing)
Tax = taxes, duties (creative bookkeeping, connections, …)
PROFIT / LOSS
REVENUES
-
COSTS
Tax
(5)
q
(2)
P
(1)
VC
(3)
FC
(4)
x
+
REVENUES UP
COSTS DOWN
Slide1717
Profit parameters
There are
ONLY FIVE
parameters
P Price (
per unit
)
VC Variable cost (
per unit
)
q Quantity (in units
per period)
FC Fixed cost (per period)
T Tax % of profit (per period
)
Note: q, FC, T must always refer to the same period.
But only
four can be influenced by the entrepreneur!
Slide1818
Profit parameter 1: Price
Price has many components:
Price
EUR/ton
Slide1919
Profit parameter 2: VC
Variable cost has four components:
VC
VC1 Cost of raw materials and ingredients
VC2 Cost of processing inputs into outputs
VC3 Cost of packaging
VC4 Cost of delivery
transport, sales commission, import duties
Slide2020
Profit parameter 3: quantity
q
= actual
quantity sold
per period
q
CAP
= quantity at full capacity utilization
quantity/hour * hours/day * days/year (harvest season)
3 ton/hour * 22 hours/day * 90 days/yr = 5940 ton/year
q
BE
= break-even quantity, where profit = 0
Slide2121
Profit parameter 4: FC
Fixed cost has
four
components:
FC
FC1 Depreciation of fixed assets
FC2 Interest paid on capital
FC3 Overhead
salaries, maintenance, transport,
internet
, etc.
FC4 Marketingadvertisement, design cost of new packaging, etc.
Slide22Profit parameter 5: Tax
This Tax refers only to profit taxOther taxes are either VC or FCTax is only paid when there is a profitConclusion:
Profit tax does not cause losses…
22
Slide23What causes losses?
P – too lowVC – too highq – too lowFC – too high
23
Which parameter is the most difficult one to predict by management?
Answer:
q – the quantity sold
Slide2424
Recognize costs - exercise
Ingredients
Labels
Bank charges
Machine repair
Machine maintenance
Raw material transport
Depreciation
Social tax
Diesel for the boiler
Electricity in the factory
Electricity in the office
Temporary labor
Management salary
Detergents and gloves
Billboard rental
Carton boxes
Are the following Variable or Fixed costs?
Slide2525
Margin and contribution
What is
MARGIN
?
Margin = earnings
per unit
Margin = price – variable cost per unit
Margin =
P – VC
What is
CONTRIBUTION
?
Contribution = earnings per period
Contribution = margin per unit * units soldContribution = (P – VC) * q
Slide2626
Margin %
Margin % indicates
risk
.
Usual risk levels in bakery are:
Slide2727
CB1
An overview:
Profit calculation for one product
for one year
Slide2828
P
VC
FC
q
contribution
profit
margin
profit per unit
Break-even
Capacity Utilization
P-VC
Slide2929
24 data fields...
Define your profit.
Get the big picture first.
Play with your data:
what if…?
Be sure
4 parameters
Slide30P
30
VC
P-VC
margin
FC
profit
q
contribution
profit per unit
Slide31What causes profits?
Margins – higherQuantity sold – higherContribution – higherFixed cost cannot be controlled in short term
Hence: maximize contribution!!
Low margin * low quantity
Low margin * high quantity
High margin * low quantity
High margin * high quantity
31
Slide3232
Part 3
Why use the Cigar Box Method?
Argument 1:
Bookkeeping is incomplete and leads to wrong business decisions
Slide3333
Profit formula 1
Bookkeeper’s method
Profit = Revenues – Total costs
Formula:
Profit =
P*q – (VC*q + FC)
“Total revenue, minus total cost is profit”
Which documents are needed?
Slide3434
Profit formula 2
Cigar Box method
Profit = Contribution – Fixed costs
Formula:
Profit =
(
P – VC) * q
–
FC
“Contribution minus fixed cost is profit”
Which documents are needed?
Slide3535
Comparing methods
Bookkeeping:
P*q – (VC*q + FC)
= Profit
Sales per period Costs per period
Cigar Box:
(P–VC) * q – FC
= Profit
Margin per unit * units per period per period
Contribution per period
End result: is the same!
Slide3636
Why Cigar Box method?
Bookkeeping:
Cigar Box:
Profit yr 2: up 25%
Profit
yr
2: up 125%!
Slide3737
Profit calculation (repetition)
P Price (per unit)
VC Variable cost (per unit)
q Quantity (in units per period)
FC Fixed cost (per period)
(P-VC) Margin (per unit)
(P-VC)*q Contribution (per period)
(P-VC)*q - FC Profit (per period)
Slide38Eight cost types (repetition)
VC1 Cost of raw material & ingredientsVC2 Cost of processing (electricity, labor, …)VC3 Cost of packaging
VC4 Cost of delivery (transport, duties, …)
FC1 Cost of depreciation
FC2 Cost of capital (interest, bank charges)
FC3 Overhead (salaries, rent, …)
FC4 Marketing (advertisement, branding, …)
38
Slide3939
Recognize costs - exercise
Apples
Stickers
Bank commission
Repair on transformer
Sugar transport
Transport crates of beer
Maintenance
Pension payment
Furnace oil for the boiler
Electricity for the cooler
Import duties
Harvest
labor
Management perks
Detergents and gloves
Sales commission
Bill board rental
Specify these costs
Slide4040
Part 4
The value chain
Learning objectives
:
Defining the players in the value chain
CB5 is a CB1 for each individual player
Understanding the concept of chain profit
Slide41Horizontal and Vertical Value chains
07-Jun-16
41
Slide42Defining business players
FarmersCollectors / PackersProcessorWholesaler / Re-packerRetailer
42
Slide43CB5 = CB1 for each player
Slide44Cumulative contribution per ton of Raw Material
44
Slide45CB5 Chain contribution
45
Slide4646
CB5
Maximize profit in the chain
Learning objectives
:
Effect of intra-chain pricing on chain profit = 0
Understand importance of processing ratio
Understand importance of chain competition
Understand importance of good farming
Calculate value added per ton of raw material
Slide47What determines chain prices?
Raw material prices, supply & demandTotal variable costs in the chainWillingness to pay of consumers
47
Slide48What changes cumulative chain value / contribution?
Raw material price?Retail price?Variable cost reductions?
48
Slide49Importance Processing Ratio
Processing ratio = tons input / tons outputReduces VC1Increases the output 10% improvement
36% more contribution!
Hence importance of latest technology, best equipment, and loss control management
49
Slide5050
CB5
Importance of harvest
Learning objectives
:
How does weather affect farming profit?
Effect of quality grades on price
The post harvest price cycle
Slide51Weather: effects on profit?
Formula: Profit = (P-VC) * q - FCQuantity affects PriceQuality affects PriceWeather affects VC
No
effect on FC
Weather has effect on CONTRIBUTION
51
Slide52Post harvest 1: grading
Higher quality higher price52
Grade
Grading
q
Price
Amount
Amount %
A
50%
500
100
50,000
60%
B
30%
300
80
24,000
29%
C
20%
200
50
10,000
12%
Total
100%
1000
84
84,000
100%
Slide53Harvest 2: Post harvest
53
Slide54What options exist to enhance profit?
54
Increase production during peak season.
Increase production during off-season.
Both.
Lower the fixed costs
Max, capacity utilization in peak season is 90%.
Slide55Which option to choose?
Option
Raw material supply
Production methods
Sales
& marketing
55
Increase production during peak season?
Increase production during off-season?
1
Same, intensify
Same, higher capacity utilization
Same, intensify
2
New, possible use of same farmers/traders
New
New, possible
use of same channels
Slide5656
Part 5
Filling CB1
Learning objectives
:
Understand that data fields are assumptions
Understand the formulas
Slide5757
P
VC
FC
q
contribution
profit
P-VC
profit per unit
Break-even
Capacity Utilization
Slide5858
Sales price P
Sales Price = Amount per unit, INCO-term City.
Tomato paste price = USD 1000 per ton, DDP Moscow.
DDP = delivered, duties paid. Delivered to Moscow in this case.
The import duties in Russia are 10% or USD 100 per ton.
VC4 = transport and commission = USD 144 per ton.
Hence the Price EXW = 1000-100-144 = USD 756 per ton.
Slide5959
Variable cost VC
Three types of variable cost:
VC1
, cost of everything which is
consumed
: raw material and ingredients.
VC2
, cost of
processing
raw material into the finished product: energy, steam, casual labor, detergents, diesel, gas.
VC3, cost of primary (jar, cap, label) and secondary (carton box, shrink wrap, pallet)
packing material.
Slide6060
Raw material & ingredients VC1
The
price of the raw material
, delivered to the factory = 71/ton.
The
processing ratio
is the quantity of raw material needed for one unit of finished good. Here: 6 kg tomato for 1 kg of paste.
Raw material cost = 71 * 6 = 429
The higher the losses, the higher the processing ratio, the more costly the finished good.
Calculate the cost of all other
ingredients
in the recipe: 12VC1 = 429 + 12 = 441.
Slide6161
Processing costVC2
Calculating VC2 is not easy.
Processing cost are calculated
per hour.
And divided by the production volume in
units per hour
.
To arrive at the processing
cost per unit
.
One must
measure the use of steam, electricity, casual labor.Not just guess it!
And measure the output per hour.
Not just guess it!Get the correct data! After that, calculation is easy: 124 / 2 = 62
Slide6262
Packing costVC3
Packing cost are calculated
per sales unit
:
1 aseptic bag in 1 steel drum = 3.2 + 18.6 = 21.8;
Other examples of sales units:
24 bottles per carton = 24*(bottle + cap + label) + 1 box + 1 sticker;
10 sachets per bag = 10*sachet + 1 bag + 1 adhesive sticker
Calculate the
number of
sales units per unit of calculation
:unit of calculation is ton = 1000 kg4.4 drums of 225 kg per ton: 1000 / 225 = 4.4
add the packing losses, say 2.2%, multiply 4.4 by 102.2% = 4.5
VC3 = cost of packing * number of packs per unit = 21.8 * 4.5 = 99
Slide6363
Total variable costVC
VC = VC1 + VC2 + VC3
Finished good losses
Warehouse losses, theft, pilferage, etc….
If there are 2% losses, enter 2% in FG losses % box.
VC = (VC1 + VC2 + VC3) * (1+ FG losses %)
VC = (441 + 62 + 99) * 1.02 = 614
Slide6464
MarginP–VC
Margin, or gross margin, is expressed
per unit
:
Margin = P(EXW) – VC = 756 – 614 = 142
Slide6565
Margin %(P–VC) / P * 100%
Margin % = Margin / P(EXW) * 100% = 142 / 756 = 19%
Margin % helps us to evaluate, if a margin is
risky
or not.
Usual risk levels in food processing and manufacturing are:
Slide6666
Contribution(P–VC) * q
The volume, or quantity sold is expressed in
units per period
.
In this example, 3600 ton of tomato based are sold.
Contribution is expressed
per period
:
Contribution = Margin per unit * quantity per period =
= 142 * 3600 = 511,623
Slide6767
Fixed costs
Three types of fixed cost:
FC1
, cost of investments:
depreciation
.
FC2
, cost of debts:
interest
.
FC3, cost of all overheads
.Salaries, social taxes, pensions, etc..Repairs, maintenance
Office & transport costMarketing
Etc…..
Slide6868
DepreciationFC1
Use a
realistic
value for the productive assets.
For a tomato processing company this is about 1.8 million.
Use a
realistic
depreciation rate.
Here: the replacement period of the factory is 12.8 years.
The depreciation = 1 / 12.8 * 100% = 7.8%
FC1 = Asset value * depreciation % = 1,800,000 * 7.8% = 140,000
Slide6969
InterestFC2
Use the real amount of the debts, with a minimum of
40% of the asset value.
For this company this is about 720,000
Use a
realistic
interest rate.
Here: 18.7% per year.
FC2
= Debt value * interest rate = 720,000 * 18.7% = 134,400
Slide7070
OverheadFC3
Enter the number of full-time equivalent staff (FTE)
10 workers, working 6 months per year = 10 * 6/12 = 5 FTE
10 workers, working 4 months per year = 10 * 4/12 =
Calculate their
salaries
, incl. all taxes and emoluments: 50,000
Calculate one lump sum amount for
all other
overheads: 20,000
FC3 = salaries + all other overhead = 50,000 + 20,000 = 70,000
3.3 FTE
Slide7171
Total fixed costsFC
FC = FC1 + FC2 + FC3
FC = 140,000 + 134,400 + 70,000 = 344,400
The contribution of tomato paste
must exceed
these costs.
In case
more than 1 product
is produced, FC must be shared.
Calculate FC % attributed to product and enter in the box: 100%
FC (attributed to product) = FC * FC % attributed to product
Slide7272
ProfitTwo methods
Cost accounting method: Profit = Contribution – Fixed costs
Bookkeeping method: Profit = Total revenues – Total costs
Result is the same!
Slide7373
SummaryCost price
Cost price = total cost per unit
Slide7474
Break-even
Break-even point is where the profit is zero.
Revenues – Cost = 0 or Contribution – Fixed cost = 0
Why calculating the break-even quantity?
When Price, VC and FC are
known
and q is
unknown
How many drums can be sold per year?
BE volume (sales) =
minimum
volume
needed to sell to make a profit.BE volume (raw material) =
minimum volume needed to process.
How much raw material do we need to buy? = 6 * 2423 = 14,538 tons
Slide7575
Capacity
q
= quantity sold =
3,600
tons of paste per year
q
CAP
= quantity produced at full capacity utilization
quantity/hour * hours/day * days/year (harvest season)
2 ton/hour *
22 hours/day * 110
days/yr = 4,840 ton/yearutilization = q / qCAP
* 100% = 3,600 / 4,840 = 74.4%
Slide7676
Part 6
Using CB1
Learning objectives
:
Filling in data fields CB1
Analyze the results!
What – if …. ??
Slide7777
P
VC
FC
q
contribution
profit
P-VC
margin
profit per unit
Break-even
Capacity Utilization
Slide7878
Part 7
(Gari) Business Plan
Learning objectives
:
Table of contents
Formulate assumptions
Validate assumptions