Cigar Box method
The Cigar Box Method is a toolkit which consists of a series of spreadsheets to help entrepreneurs, notably those in agrobusiness in emerging markets, to calculate the costs of goods, margins, contribution, break-even volumes and profitability. It can be used for a single product or a complete portfolio of products. There are 6 Cigar Box (CB) categories:
- CB1: cost price for one single product,
- CB2: contribution for a range of products,
- CB3: daily monitoring of cost price for a range of products,
- CB4: investment and finance projections with yearly cash flow,
- CB5: cost price based value chain analysis,
- CB6: customer satisfaction analysis.
The Cigar Box Method has been developed by Olivier van Lieshout and Orlando van Geuns, and is actively being used by agro-entrepreneurs worldwide. Recent examples are from EBRD-sponsored projecys in Morocco, Ukraine, Egypt, Montenegro and Bosnia as well from ITC-sponsored projects in Romania, Armenia, Central Asia, Bangladesh, Senegal, Guinea, Benin, Kenya, Tanzania, Jamaica and Argentina. The method derived its name from Dutch pioneers in the 17th Golden Century who were discussing foreign business deals while sipping coffee and smoking a cigar. When they needed to make quick business calculations, they often used the bottom side of the cigar box to convince investors about the profitability of their business ideas in a quick, concise and convincing manner..
History and current use
The method was first used in 1999 as an analytical tool during a course on foreign direct investment (FDI) at the Wageningen University. It analyzed the suitability, including a risk analysis and potential benefits, of specific agricultural production processes for foreign investors. Between 1999 and 2012 over 180 students were trained in the use of the Cigar Box Method. It has since developed into a fully fledged business analysis tool with multiple purposes and used by various targets groups: as analytical tool for foreign investors and bankers, as business planning tool for fruit and vegetable processing factories and business development service providers. An adapted version for women entrepreneurs in Africa has been developed recently. The method is described in the Agribusiness Handbook for Fruit and Vegetable Processing published by the Food and Agricultural Organization (FAO). The Cigar Box is used frequently by Bakery Initiatives as a navigator to bakery profit.
The Cigar Box Method of profit calculation uses only five parameters:
P = Price (per unit) VC = Variable cost (per unit) FC = Fixed cost (per period) q = Quantity (in units per period) T = Tax (as % of profit).
More specifically, in (food) processing business, there are three types of variable cost: VC1 = Raw Materials and Ingredients, VC2 = costs of processing inputs into outputs, VC3 = costs of packaging materials. The fixed cost (FC) are also divided into three types: FC1 = depreciation of fixed assets, FC2 = interests paid, FC3 = overheads (salaries, transport, maintenance, marketing, ...). Using these 5 parameters in simple formulas, a trained person can do a Cigar Box Profit analysis in half an hour. When data are missing assumptions can be made using educated guesses.
Profit calculation methods
There are three different methods to calculate profit. All use the same parameters and lead to the same result.
1. = Bookkeeping method
Sales - Total cost P*q - (VC*q + FC)
2. = Trader's method
Profit per unit * units sold (P - VC - FC/q) * q
3. = Cigar Box method
Contribution - Fixed cost (P - VC) * q - FC
The Cigar Box Method is an Excel-based model, and can be used even by Excel beginners. Only one spreadsheet is needed per product. The Cigar Box Method purposely does not make use of specific software, to enable its easy spread worldwide. The Cigar Box Method is free for anyone who is interested in it and is currently available in English, French, Russian and Spanish.