Upload
damon-simmons
View
214
Download
0
Tags:
Embed Size (px)
Citation preview
PROMISE
PROMISE
PROMISE
PROMISE
Business Financial Modeling
August, 2011
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
“Contribution Margin Analysis” is the Foundation Uses a “Building Block” Methodology Simplifies Company Financial Analysis Improves Strategic Decisions Great Teaching Tool
Business Financial Modeling - WHAT ?
Analyze FIXED vs VARIABLE Expenses
Relationship of CAPACITY vs FIXED EXPENSES
Understand Your CAPACITY UTILIZATION
Monitor Your SALES PIPELINE
Selective Use of CONTRIBUTION MARGIN PRICING
Contribution Margin Analysis - Review
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
Increase Total Company PROFITABILITY Strategic Use of DISCOUNTED PRICING with Select Customers
“Any incremental revenue exceeding the Variable Cost of delivering a product or service makes a contribution toward covering total company Fixed Expenses.”
Contribution Margin Pricing – WHAT ?
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
Contribution Margin Pricing (CMP)
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
Fixed Expenses
Revenues
MaxProfit
CMP
Sales - Variable Expenses = Contribution Margin
Contribution Margin / Revenues = CM %
Breakeven Volume = Fixed Expenses / CM%
Calculating Breakeven Volume
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
Angelo imports light bulbs - Needs Domestic Supplier Supreme manufactures light bulbs - Has Excess Capacity
Supreme Angelo
Variable Raw Material $ 0.05 N/A
Variable Labor 0.10 N/A
Allocated Fixed Overhead 0.08 N/A
Total Cost $ 0.23 $ 0.24
Regular Selling Price 0.30 0.30
Gross Profit 23% 20%
Discount Price to Angelo 0.22 N/A
Contribution Margin 32% 27% $ 15 MM 5 year Supply Agreement adds $4.8 MM to Supreme Profits
Classic Example - Contribution Margin Pricing
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
Situation - Acme Manufacturing generated $1 MM in revenues last year, selling 500 units at $2000 each, resulting in a Gross Profit of 40%. However, Acme showed zero net profit as SG&A expenses were $400,000.
Coyote Distributing is interested in buying 100 units at $1500 each, well below Acme’s regular selling price.
Should Acme accept the purchase offer ?
Contribution Margin Pricing - Example
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
“Slicing & Dicing” - Viewing Your Company From Different Angles
“Drilling Down” – Examining Cascading Levels of Fixed Expenses & Capacity Utilization
“Peeling the Onion” - Finding the Golden Nuggets
Building Block Methodology
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
Building Blocks – Basic Template
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
Sales -Variable Expenses =Gross Contribution Margin
Fixed ExpensesMinus
Net IncomeEquals
“Slicing & Dicing” - Executive Forums
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
CEO Forums Key Forums
Higher Gross Contribution
Margin %
LowerGross Contribution
Margin %
TotalGross Contribution
Margin $
Fixed ExpensesMinus Capacity Utilization % ?
$ Net IncomeEquals
“Drilling Down” - Executive Forums
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
CEO Forums Key Forums
Gross Contribution
Margin $
Gross Contribution
Margin $
Fixed Expense $ Fixed Expense $
Net Contribution
Margin $
Net Contribution
Margin $
TotalNet Contribution
Margin $
Minus Capacity Utilization % ?
Fixed Expense $Minus Capacity Utilization % ?
$ Net Income
Equals
“Slicing & Dicing” - Executive Forums
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
Customer Group ACEO & Key
Highest Contribution Margin $
Customer Group BCEO Only
Highest Contribution Margin %
Customer Group CKey Only
Lowest Contribution Margin % & $
Total Gross Contribution
Margin $
Fixed Expenses $Minus Capacity Utilization % ?
$ Net IncomeEquals
Business Segments / Divisions Customers / Groups of Customers Salespeople Products Locations Industries
Consistent Formula:
Revenues - Variable Expenses = Contribution Margin
“Slicing & Dicing” - Options
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
Full / Absorption Accounting allocates Fixed Overhead Expenses to Divisions, Products, Jobs, Locations, Sales People, Estimates, Quotes, etc…..usually on the basis of revenues.
Based on Prior Period Results. Misleading Assessments of Unit Profitability Lost Business and Lower Total Company Profit
Comparison to Full / Absorption Accounting
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS
Acme Chemical, Inc. Distributor of Commodity & Specialty Chemicals History of Growing Revenues History of Sporadic Profitability 2011 on Track for $18 MM Revenues 2011 on Track for $300,000 Net Income
Example of “Peeling the Onion”
EXAMPLE – Financial Modeling
The Next Level is Closer Than You Think Renaissance EXECUTIVE FORUMS