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: invoicing and sales analysis.

Contents

Origins

The Cigar Box Method has been developed by Olivier van Lieshout and Orlando van Geuns, and is actively being used by agro-entrepreneurs 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 2008 over 150 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)[1].

Profit Parameters

The Cigar Box Method consists of only five parameters:

P = Price (per unit), VC = Variable cost (per unit), FC = Fixed cost (per unit), q = Quantity, 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 the 5 parameters and their sub-components in simple formulas, a trained person can do a Cigar Box Method analysis in half an hour, even when data are missing - assuming educated guesses regarding missing data.

Excel

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[2].

References

http://en.wikipedia.org/wiki/Wageningen_University

External links


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