How Bakers Can Make Better Business Decisions The
How Bakers Can Make Better Business Decisions The Cigar Box Method® by Olivier van Lieshout Bakery Initiatives www. bakeryinitiatives. com 1
Cigar Box Method CB 1: profit from one single product CB 2: profit from a range of products CB 3: profit monitoring on daily basis CB 4: investment analysis CB 5: value chain analysis CB 6: customer satisfaction analysis CB 7: cash flow analysis 2
Cigar Box applications worldwide > 100 users Bakery jobs 3
Why are we in bakery business? To make profit! 4
Part 1 How to bake profit? 1. 2. 3. 4. There are only five profit parameters. Differentiate variable and fixed costs. Define margin and contribution. Two profit formulas 5
How to calculate profit ? PROFIT / LOSS - Tax (5) REVENUES UP REVENUES P (1) x q (2) - COSTS VC (3) + FC (4) COSTS DOWN 1. P = price 2. q = quantity sold 3. VC = variable cost (raw materials, processing, packaging) 4. FC = fixed cost (depreciation, interest, overhead, marketing) 6
Profit parameters There are ONLY FIVE parameters l P Price (per unit) l VC Variable cost (per unit) l q Quantity (in units period) l FC Fixed cost (per period) l 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! 7
Profit parameter 1: Price has many components: Price EUR/ton 8
Profit parameter 2: VC Variable cost has four components: VC l VC 1 Cost of raw materials and ingredients l VC 2 Cost of processing inputs into outputs l VC 3 Cost of packaging l VC 4 Cost of delivery l l transport, sales commission, import duties Returned goods, unsold 9
Profit parameter 3: quantity l q = actual quantity sold period l 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 l q. BE = break-even quantity, where profit = 0 10
Profit parameter 4: FC Fixed cost has four components: FC l FC 1 Depreciation of fixed assets l FC 2 Interest paid on capital l FC 3 Overhead of bakery l l salaries, maintenance, transport, internet, rent, etc. FC 4 Marketing l advertisement, design cost of new packaging, etc. 11
Profit parameter 5: Tax l l This Tax refers only to profit tax Other taxes are either VC or FC Tax is only paid when there is a profit Conclusion: Profit tax does not cause losses… 12
What causes losses? l l l P – too low VC – too high q – too low FC – too high Which parameter is the most difficult one to predict by management? Answer: q – the quantity sold 13
Recognize costs - exercise Are the following Variable or Fixed costs? 1. 2. 3. 4. 5. 6. 7. 8. Ingredients Labels Bank charges Machine repair Machine maintenance Raw material transport Depreciation Social tax 9. 10. 11. 12. 13. 14. 15. Diesel for the boiler Electricity in the factory Electricity in the office Temporary labor Management salary Detergents and gloves Billboard rental 14
Margin and contribution What is MARGIN? l Margin = earnings per unit l Margin = price – variable cost per unit l Margin = P – VC What is CONTRIBUTION? l Contribution = earnings period l Contribution = margin per unit * units sold l Contribution = (P – VC) * q 15
Margin % l l Margin % indicates risk. Usual risk levels in bakery are: 16
CB 1 An overview: Profit calculation for one product for one year 17
P profit FC VC P-VC margin profit per unit q contribution Break-even Capacity 18 Utilization
4 parameters 24 data fields. . . Get the big picture first. Define your profit. Play with your data: what if…? Be sure 19
What causes profits? l l l Margins – higher Quantity sold – higher Contribution – higher Fixed cost cannot be controlled in short term Hence: maximize contribution!! l l Low margin * low quantity Low margin * high quantity High margin * low quantity High margin * high quantity 20
Part 2 Why use the Cigar Box Method? Argument 1: Bookkeeping is incomplete and leads to wrong business decisions 21
Profit formula 1 Bookkeeper’s method l l l Profit = Revenues – Total costs Formula: Profit = P*q – (VC*q + FC) “Total revenue, minus total cost is profit” Which documents are needed? 22
Profit formula 2 Cigar Box method l l l Profit = Contribution – Fixed costs Formula: Profit = (P – VC) * q – FC “Contribution minus fixed cost is profit” Which documents are needed? 23
Comparing methods Bookkeeping: P*q – (VC*q + FC) = Profit Sales period Costs period Cigar Box: (P–VC) *q Margin per unit * units period – FC = Profit period Contribution period End result: is the same! 24
Why Cigar Box method? l Bookkeeping: l Cigar Box: l Profit yr 2: up 25% l Profit yr 2: up 125%! 25
CB 2 – Contribution Analysis 26
Why use the Cigar Box Method? Argument 2: Allocating fixed costs leads to wrong business decisions. 27
Cost price formula l l l Total cost = Variable costs + Fixed costs Cost price per unit = TC / q Formula: TC/q = VC + FC/q Is 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…! 28
Allocating fixed costs to SKU’s 29
Why use the Cigar Box Method? Argument 3: Classic P&L is not actionable CB 2 P&L helps with business decisions. 30
Better understanding of P&L Direct costs Variable costs Indirect costs Fixed costs
Why use the Cigar Box Method? Argument 4: Daily KPI updates, not analysis after one month. 32
CB 3 – Operational monitoring Keep track of costs & KPI on a daily basis l Benchmark costs & KPI’s l Take action on deviations l Continuous improvement l 33
How to apply the Cigar Box? l l Stand alone in Excel CB 2: Adapt existing bookkeeping system l l Add CB labels to chart of accounts Add CB labels to articles lists Design CB 2 periodic report CB 3: Adapt existing ERP system l l l Add actual VC 1, VC 2, VC 3 to production orders Add non-financial KPI’s (k. Wh, liters, machine hours, OEE, Scada, MES) Design CB 3 daily report 34
Who can apply the Cigar Box? l l l Your local software supplier In consultation with a certified Cigar Box specialist. Quite easy really…. 35
How Can Bakers Make Better Business Decisions? Use the Cigar Box® Method Thank you for your attention 36
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