#### Transcript Business Approach to Enterprise Development

The Cigar Box® Method Profit calculations made easy by Olivier van Lieshout Global Facts www.globalfacts.nl 1 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: pyramid analysis Visit: www.globalfacts.nl for free downloads. 2 Contents CB1 training 1. 2. 3. 4. The five profit parameters Calculating profit Filling the Cigar Box Get a laptop and practice! 3 Part 1 The five profit parameters Learning objectives: 1. There are only five profit parameters. 2. Difference variable and fixed costs. 3. Difference bookkeeping and cost accounting. 4 How to calculate profit ? PROFIT / LOSS - Tax (5) REVENUES UP REVENUES P (1) x q (2) - COSTS VC (3) + FC (4) COSTS DOWN 1. 2. 3. 4. 5. P = price q = quantity sold VC = variable cost (raw materials, processing, packaging) FC = fixed cost (depreciation, interests, overhead) Tax = taxes, duties (creative bookkeeping, connections, …) 5 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 four can be influenced by the entrepreneur! 6 Profit parameter 1: Price Price has many components: Price DDP Delivered, duties paid DDU Delivered, duties unpaid CIF Cost, Insurance, Freight C&F Cost and Freight DAF Delivered at Frontier FOB Free on Board EXW Ex Works 20 18 18 17 14 12 10 7 Profit parameter 2: VC Variable cost has four main 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 Where to obtain correct data ? 8 Internal & external VC Internal are all VCs inside the factory: VC1 Cost of Ingredients VC 2 Cost of processing VC3 Cost of packaging VC = VC1 + VC2 + VC3 External are VCs outside the factory: VC4 Cost of delivery P(C&F) – VC4 = P(EXW) VC4 = P(C&F) – P(EXW) 9 Profit parameter 3: quantity q = actual quantity sold per period qCAP = 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 qBE = break-even quantity, where profit = 0 10 Profit parameter 4: FC Fixed cost has three main components: FC FC1 Depreciation of fixed assets FC2 Interest paid on capital FC3 Overhead salaries, repairs, transport, marketing, etc Where to obtain correct data ? 11 Recognize costs - exercise Are the following Variable or Fixed costs? 1. 2. 3. 4. 5. 6. 7. 8. Ingredients Labels Bank charges Machine repair Raw material transport Product transport Depreciation Social tax 9. 10. 11. 12. 13. 14. 15. 16. Diesel for the boiler Electricity in the factory Electricity in the office Casual labor Management salary Detergents and gloves Interest on loans Carton boxes 12 Part 2 Calculating profit Learning objectives: 1. Margin & Contribution 2. Cost price calculation 3. Profit calculation formulas 4. Difference bookkeeping and Cigar Box method 13 Five profit parameters + three analysis parameters P = price q = quantity VC = variable cost FC = fixed cost T = taxes Margin, Contribution, Cost price 14 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 sold Contribution = (P – VC) * q 15 Three calculation methods 1. 2. 3. Bookkeeper’s method Trader’s method Cigar Box method 16 Profit formula 1 Bookkeeper’s method Profit = Revenues – Total costs Formula: Profit = P*q – (VC*q + FC) “Total revenue, minus total cost is profit” 17 Profit formula 2 Trader’s method Profit = Profit per unit * Units sold Formula: Profit = (P – VC – FC/q) * q “Price less total cost per unit, multiplied by the number of units is the profit” 18 Profit formula 3 Cigar Box method Profit = Contribution – Fixed costs Formula: Profit = (P – VC) * q – FC “Price less variable cost is the margin per unit, multiplied by the number of units is the contribution, minus fixed cost is profit” 19 Three profit calculation methods 1. Bookkeeper’s method Profit = P*q – (VC*q + FC) 2. Trader’s method Profit = (P – VC – FC/q) * q 3. Cigar Box method Profit = (P – VC) * q – FC P = 10, q=10, VC=5, FC=30 = 10*10 – (5*10 + 30) = 100 – (50 + 30) = 100 – 80 = 20 = (10 – 5 – 30/10) * 10 = (10 – 5 – 3) * 10 = 2 * 10 = 20 = (10 – 5) * 10 – 30 = 5 * 10 – 30 = 50 – 30 = 20 20 Cost price formula Is cost price calculated per period or per unit? Answer: per unit! $0.40 per kg; $30 per carton; $23,000 per car What is the formula? Answer: TC/q = VC + FC/q In words: Cost price per unit = variable cost + fixed cost per unit 21 Cost price calculation Formula: TC/q = VC + FC/q Cost price per unit = 5 + 30/10 = 5 + 3 = 8 P = 10, q = 10, VC = 5, FC = 30 P = 10, q = 15, VC = 5, FC = 30 Cost price per unit = 5 + 30/15 = 5 + 2 = 7 Is the cost price a constant figure? Answer: no, it fluctuates with q, the quantity sold! Variable cost is fixed & Fixed cost is variable…. Therefore: the Trader’s method is not used! 22 Comparing the other methods Bookkeeping: – (VC*q + FC) – T = PAT P*q Sales per period Costs per period Taxes per period Cigar Box: (P–VC) *q Margin per unit units per period – FC – T = PAT per period Contribution per period End result: is the same! 23 Why Cigar Box method? Bookkeeping: Year 1 A P 100 q 15 Revenues 1500 Variable costs Contribution Fixed costs Profit before tax B 150 10 1500 C 200 10 2000 Total Year 2 A P 100 q 15 Revenues 1500 Variable costs Contribution Fixed costs Profit before tax B 150 20 3000 C 200 13 2600 Total 5000 4300 700 500 200 7100 6350 750 500 250 Profit yr 2: up 25% Cigar Box: Year 1 P Variable cost/unit Margin/unit q Contribution Fixed costs Profit before tax A 100 80 20 15 300 B 150 160 -10 10 -100 C Total 200 150 50 10 500 700 500 200 Year 2 P Variable cost/unit Margin/unit q Contribution Fixed costs Profit before tax A 100 80 20 15 300 B 150 160 -10 0 0 C Total 200 150 50 13 650 950 500 450 Profit yr 2: up 125%! 24 Profit parameters (repetition) 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) Tax Tax % of profit (per period) Not more! 25 Analysis parameters per unit or per period? Margin is….? Margin per unit Margin = price – VC Contribution is….? Contribution per period Contribution = margin * q Cost price is ….? Cost price per unit Variable cost + Fixed cost per unit That’s all = VC + FC/q 26 Recognize costs - exercise Which cost types are these? Apples 2. Stickers 3. Bank commission 4. Repair on evaporator 5. Sugar transport 6. Transport crates of beer 7. Depreciation 8. Pension payment 1. 9. 10. 11. 12. 13. 14. 15. 16. Furnace oil for the boiler Electricity in the factory Import duties Harvest labor Management perks Detergents and gloves Sales commission Beer creates 27 Part 3 Using the Cigar Box Learning objectives: 1. Filling the Cigar Box; 2. Analyze the results! 3. Importance of capacity utilization. 28 CIGAR BOX 1 - Tomato paste 25 Brix, aseptic bags of 220 kg in steel drums USD per ton Price (DDP Moscow) 1,000 Total Revenue Import duties, 10% 100 Total Cost Transport, sales commission 3% 144 Profit Before Tax Price (EXW) 756 Profitability % P Price (Raw Material, delivered factory) Processing ratio Raw Material cost Other ingredients VC1 71 6.0 429 70% 12 2% 441 72% Production cost per hour (steam, electricity) Production volume per hour (ton/hour) VC2 124 2 62 10% Cost of packing (aseptic bag, drum) Number of drums per ton VC3 21.8 4.5 99 16% VC FG losses % VC Gross margin Gross margin % P-VC Variable cost Fixed Cost / q profit per unit profit Asset value Depreciation % FC1 FC USD per year 2,721,600 2,554,377 167,223 6% 1,800,000 7.8% 140,000 41% Debt (40% of Asset value) Interest rate FC2 720,000 18.7% 134,400 39% Number of FTE employed Salaries staff incl. social taxes Other overhead, repairs, maintenance FC3 15 50,000 15% 20,000 6% 70,000 20% 2.0% 614 100% FC FC % attributed to product FC (attributed to product) 344,400 100% 100.0% 344,400 142 19% Volume sold q (ton) Contribution 3,600 511,623 614 87% Break even volume (sales) Break even volume (raw material) 96 13% q contribution 2,423 21,600 Break-even Output capacity per hour in ton 2.0 Total Cost / q 710 100% Working hours per day 22 Length of harvesting season in days 110 Profit / q 46 Max. output capacity per year 4,840 Capacity utilization % 74.4% Note: figures in blue are assumptions; figures in pink are calculated in another sheet; figures in black are formulas Capacity Utilization 29 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. Price (DDP Moscow) Import duties, 10% Transport, sales commission 3% Price (EXW) USD per ton 1,000 100 144 756 100% 10% 14% 76% 30 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. 31 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: 12 VC1 = 429 + 12 = 441. Price (Raw Material, delivered factory) Processing ratio (kg RM for 1 kg FG) Raw Material cost Other ingredients VC1 71 6.0 429 70% 12 2% 441 72% 32 Processing cost VC2 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 Production cost per hour (steam, electricity) Production volume per hour (ton/hour) VC2 124 2 62 10% 33 Packing cost VC3 Packing cost are calculated per sales unit: 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: 1 aseptic bag in 1 steel drum = 3.2 + 18.6 = 21.8; unit of calculation is ton = 1000 kg 4.4 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 Cost of packing (aseptic bag, drum) Number of drums per ton VC3 21.8 4.5 99 16% 34 Total variable cost VC 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 VC1 - Raw material & Ingredients VC2 - Processing cost VC3 - Primary & secondary packaging 441 72% 62 10% 99 16% FG losses % VC 2.0% 614 100% 35 Margin P–VC Margin, or gross margin, is expressed per unit: Margin = P(EXW) – VC = 756 – 614 = 142 Price (EXW) VC 756 614 Gross margin Gross margin % 142 19% 36 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: Margin % Level <15% Very risky 15-25% Risky 25-35% 35-45% 45-70% >70% Normal Robust Very robust Unlikely Comment Only acceptable when the production process parameters and all prices are fully under control. Only acceptable if production and price fluctuations are within 5-10% range. Check your calculations again! 37 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 Gross margin Gross margin % 142 19% Volume sold q (ton) Contribution 3,600 511,623 38 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 cost Marketing Etc….. 39 Depreciation FC1 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 Asset value Depreciation % FC1 1,800,000 7.8% 140,000 41% 40 Interest FC2 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 Debt (40% of Asset value) Interest rate FC2 720,000 18.7% 134,400 39% 41 Overhead FC3 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 = 3.3 FTE 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 Number of FTE employed Salaries staff incl. social taxes Other overhead, repairs, maintenance FC3 15 50,000 15% 20,000 6% 70,000 20% 42 Total fixed costs FC 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 FC1 - depreciation FC2 - interest FC3 - overhead 140,000 41% 134,400 39% 70,000 20% FC FC % attributed to product FC (attributed to product) 344,400 100% 100.0% 344,400 43 Profit Two methods Cost accounting method: Profit = Contribution – Fixed costs Bookkeeping method: Profit = Total revenues – Total costs Result is the same! Cost accounting method Cost accounting method Contribution Contribution Fixed costs Fixed costs Profit before Tax Profit before Tax Bookkeeping method Bookkeeping method Total Revenue Total Revenue Total Cost Total Cost Profit before Tax Profit before Tax Profitability % Profitability % USD USD per year per year 511,623 511,623 344,400 344,400 167,223 167,223 USD USD per year per year 2,721,600 2,721,600 2,554,377 2,554,377 167,223 167,223 6% 6% 44 Summary Cost price Cost price = total cost per unit Variable Cost per unit (VC) 614 87% Fixed Cost per unit (FC/q) 96 13% Total Cost per unit (VC+FC/q) 710 100% Price (EXW) 756 Profit per unit (P-VC-FC/q) 46 6% 45 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 Break even volume (sales) Break even volume (raw material) 2,423 21,600 46 Capacity q = quantity sold = 3,600 tons of paste per year qCAP = 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/year utilization = q / qCAP * 100% = 3,600 / 4,840 = 74.4% Volume sold q (ton) 3,600 Output capacity per hour in ton Working hours per day Length of harvesting season in days Max. output capacity per year Capacity utilization % 2.0 22 110 4,840 74.4% 47 Capacity utilization How does Capacity utilization affect Cost Price? Higher utilization % higher q lower FC/q VC does not change, hence lower cost price TC: TC1 = VC + FC/q1 TC2 = VC + FC/q2 = 24 + 2400 / 100 = = 24 + 2400 / 120 = 48 44 With same P, lower TC higher profit per unit Profit 1 = Price – TC1 Profit 2 = Price – TC2 = 60 – 48 = = 60 – 44 = 12 16 48 Capacity utilization 2 How does Capacity utilization affect the Profit ? higher capacity utilization more units are sold and higher profit per unit. Profit = Profit 1 = Profit 2 = Increase Increase % units sold * profit per unit 100 120 20 20% * * 12 16 4 33% = = 1200 1920 720 60% Conclusion: with 20% increase in volume, the profit increases by 60%!! 49 Part 4 Practice Learning objective: 1. Each person, with own laptop and CB1 installed, able to obtain correct data from the sources provided and fill in into CB1 2. Able to carry out a series of sensitivity tests. 50 Crème de la Ferme Logical Food Technologies B.V. has developed Crème de la Ferme. Crème de la Ferme is an instant cheese powder consisting of fresh natural healthy traceable ingredients. The powder is a mixture of milk powder and natural or natural identical flavors. The instant cheese powder is dissolved in hot water and pasteurized, which gives a stable healthy cheese spread that should be hot-filled and sealed. With the use of a base and flavor powder a variety of cheese flavors can be produced easily. Crème de la Ferme cheese base powder is supplied in 25 kg bags and the cheese flavor powder is supplied in 2,5 kg bags. The bags are made of a multi-layer paper with a poly inner liner. The base and flavor powders are mixed with 110 – 125% water. This gives the client the possibility to produce cheese spread locally at a very competitive price. Cheddar, Gouda, Emmentaler, Parmesan Goat cheese, Mozzarella, Camembert Feta, Cream cheese Local licensees / purchasers of Crème de la Ferme have opportunity to add local herbs, spices, etc to enlarge their product range. Cost for freight, local legislative requirements, import duties, certification for Halal, Kosher, or GOS are charged extra. http://www.cdlf.nl/ 51 Melted cheese from powder 52 Production and Filling Production takes place in batches of 50-80 kg. Batch processing time is 7 minutes, or about 8-9 batches per hour. During one batch, the equipment consumes about €1,25 in steam and electricity. Six workers are needed per 8 hour shift. The product can be sold at €5,80 per kg in the shop. The filler can do 4,800 cups per hour. Cup size can vary from 100 to 250 gram. The price for a cup, seal and label is: 100 gram = €0,085 150 gram = €0,10 A carton box takes: 100 gram = 18 cups 150 gram = 12 cups Box + label cost €0,50 53 Recipe and Investment 1 2 3 4 8 Ingredient CDLF Instant Gouda Flavor Base powder FCMP (DDP) Water BATCH 1 2 3 4 5 6 7 8 Recipe Cost per Kg Cost in batch 5.5 kg 14.40 79.22 20.0 kg 4.75 95.00 30.6 kg 0.05 1.53 56.10 kg 175.75 Investment Mix & smelt unit Inline homogeniser UHT pasterurizer Cup filler (4800/hr) Utilities Building Price EUR 60,000 15,000 65,000 105,000 130,000 250,000 BATCH 625,000 % 10% 10% 10% 10% 10% 5% Depreciation 6,000 1,500 6,500 10,500 13,000 12,500 8.0% 50,000 % 45.1% 54.1% 0.9% 0.0% 0.0% 100.0% 54 CB1 Fill in the data Gouda Melted Cheese in 150 gram cups. Fill in the Cigar Box using the data above. Make your own assumptions where needed. Time needed: Experienced person: 5 minutes Learner: ?? Good luck! 55 CIGAR BOX 1 - Gouda Melted Cheese, (sterilized 4800 cups/hour) in cups of 150gr, 12 per carton box (1.8 kg) per ton Price (Retail price, delivered) 5,800 Total Revenue VAT 6% 328 Total Cost VC4 Transport cost 100 Profit Before Tax Price (EXW) 5,372 Profitability % Price (Gouda CDLF, DDP factory) Processing ratio Raw Material cost Other ingredients, DDP factory VC1 Production cost per hour (gas, electricity) Production volume per hour (ton/hour) VC2 Cost of packing (cup, seal, label, box) Number of bags per ton VC3 FG losses % VC Gross margin Gross margin % Variable cost Fixed Cost / q 16,579 0.10 1,625 37% 1,721 39% 3,346 76% 10.71 0.48 22 0.5% 1.70 556 944 21% 2.0% 4,399 100% 973 18% 4,399 89% Nov-11 per year 2,148,679 1,983,537 165,142 8% Asset value Depreciation % FC1 625,000 8.0% 50,000 22% Debt (40% of Asset value) Interest rate FC2 250,000 15.0% 37,500 17% Number of FTE (8hr/day) employed Salaries staff incl. social taxes Other overhead, repairs, maintenance FC3 12 86,400 39% 50,000 22% 136,400 61% FC FC % attributed to product 223,900 100% 100.0% FC (attributed to product) 223,900 Volume sold q (ton) Contribution 400 389,042 Break even volume (sales) Break even volume (raw material) 230 39 560 11% Output capacity per hour in ton Total Cost / q 4,959 100% Operating hours per day Working days per year Profit / q 413 Max. output capacity per year Capacity utilization % Note: figures in blue are assumptions; figures in pink are calculated in another sheet; figures in black are formulas 0.48 8 250 962 41.6% 56