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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