The Cigar Box Method by Olivier van Lieshout Bakery Initiatives www bakeryinitiatives com 2 Cigar Box Method CB1 profit from one single product CB2 profit from a range of products ID: 1042122
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1. 1How Bakers Can Make Better Business Decisions The Cigar Box Method®by Olivier van LieshoutBakery Initiativeswww.bakeryinitiatives.com
2. 2Cigar Box MethodCB1: profit from one single productCB2: profit from a range of productsCB3: profit monitoring on daily basisCB4: investment analysisCB5: value chain analysisCB6: customer satisfaction analysisCB7: cash flow analysis
3. Cigar Box applications worldwide > 100 users3Bakery jobs
4. Why are we in bakery business?To make profit!4
5. 5Part 1How to bake profit? There are only five profit parameters.Differentiate variable and fixed costs.Define margin and contribution. Two profit formulas
6. 6How to calculate profit ?P = priceq = quantity soldVC = variable cost (raw materials, processing, packaging)FC = fixed cost (depreciation, interest, overhead, marketing) Tax = taxes, duties (creative bookkeeping, connections, …)PROFIT / LOSSREVENUES-COSTS Tax(5)q(2)P(1)VC(3)FC(4)x+REVENUES UPCOSTS DOWN
7. 7Profit parametersThere are ONLY FIVE parametersP 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!
8. 8Profit parameter 1: PricePrice has many components:PriceEUR/ton
9. 9Profit parameter 2: VCVariable cost has four components:VCVC1 Cost of raw materials and ingredientsVC2 Cost of processing inputs into outputsVC3 Cost of packagingVC4 Cost of delivery transport, sales commission, import dutiesReturned goods, unsold
10. 10Profit parameter 3: quantityq = actual quantity sold per periodqCAP = quantity at full capacity utilization quantity/hour * hours/day * days/year (harvest season) 3 ton/hour * 22 hours/day * 90 days/yr = 5940 ton/yearqBE = break-even quantity, where profit = 0
11. 11Profit parameter 4: FCFixed cost has four components:FCFC1 Depreciation of fixed assetsFC2 Interest paid on capitalFC3 Overhead of bakerysalaries, maintenance, transport, internet, rent, etc.FC4 Marketingadvertisement, design cost of new packaging, etc.
12. Profit parameter 5: TaxThis 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…12
13. What causes losses?P – too lowVC – too highq – too lowFC – too high13Which parameter is the most difficult one to predict by management?Answer: q – the quantity sold
14. 14Recognize costs - exerciseIngredientsLabelsBank chargesMachine repairMachine maintenanceRaw material transportDepreciationSocial taxDiesel for the boilerElectricity in the factoryElectricity in the officeTemporary laborManagement salaryDetergents and glovesBillboard rentalCarton boxesAre the following Variable or Fixed costs?
15. 15Margin and contributionWhat is MARGIN?Margin = earnings per unitMargin = price – variable cost per unitMargin = P – VCWhat is CONTRIBUTION?Contribution = earnings per periodContribution = margin per unit * units soldContribution = (P – VC) * q
16. 16Margin %Margin % indicates risk. Usual risk levels in bakery are:
17. 17CB1An overview: Profit calculation for one product for one year
18. 18PVCFCqcontributionprofitmarginprofit per unitBreak-evenCapacity UtilizationP-VC
19. 1924 data fields...Define your profit.Get the big picture first.Play with your data:what if…?Be sure4 parameters
20. What causes profits?Margins – higherQuantity sold – higherContribution – higherFixed cost cannot be controlled in short termHence: maximize contribution!!Low margin * low quantityLow margin * high quantityHigh margin * low quantityHigh margin * high quantity20
21. 21Part 2Why use the Cigar Box Method?Argument 1: Bookkeeping is incomplete and leads to wrong business decisions
22. 22Profit formula 1Bookkeeper’s methodProfit = Revenues – Total costsFormula: Profit = P*q – (VC*q + FC)“Total revenue, minus total cost is profit”Which documents are needed?
23. 23Profit formula 2Cigar Box methodProfit = Contribution – Fixed costsFormula: Profit = (P – VC) * q – FC “Contribution minus fixed cost is profit”Which documents are needed?
24. 24Comparing methodsBookkeeping: 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 periodEnd result: is the same!
25. 25Why Cigar Box method?Bookkeeping:Cigar Box:Profit yr 2: up 25%Profit yr 2: up 125%!
26. CB2 – Contribution Analysis26
27. 27Why use the Cigar Box Method?Argument 2:Allocating fixed costs leads to wrong business decisions.
28. 28Cost price formulaTotal cost = Variable costs + Fixed costsCost price per unit = TC / qFormula: TC/q = VC + FC/qIs the cost price a constant figure?Answer: no, it fluctuates with q, the quantity sold!In the cost price, the variable costs are fixed and the fixed costs are variable…!
29. Allocating fixed costs to SKU’s29
30. 30Why use the Cigar Box Method?Argument 3:Classic P&L is not actionableCB2 P&L helps with business decisions.
31. Better understanding of P&LDirect costsIndirect costsIndirect costsVariable costsFixed costs
32. 32Why use the Cigar Box Method?Argument 4:Daily KPI updates, not analysis after one month.
33. CB3 – Operational monitoringKeep track of costs & KPI on a daily basisBenchmark costs & KPI’sTake action on deviationsContinuous improvement33
34. How to apply the Cigar Box?Stand alone in ExcelCB2: Adapt existing bookkeeping system Add CB labels to chart of accountsAdd CB labels to articles listsDesign CB2 periodic reportCB3: Adapt existing ERP system Add actual VC1, VC2, VC3 to production ordersAdd non-financial KPI’s (kWh, liters, machine hours, OEE, Scada, MES)Design CB3 daily report34
35. Who can apply the Cigar Box?Your local software supplierIn consultation with a certified Cigar Box specialist. Quite easy really…. 35
36. 36How Can Bakers Make Better Business Decisions? Use the Cigar Box® MethodThank you for your attention