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You have received this Profit Plan Newsletter as a licensed
user of Profit Plan® -- Your Vision of Tomorrow®.
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PROFIT PLAN PLANNING TIPS - March, 2002
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March Contents:
Profit Plan Training - Feedback
Functional Cosmetics
- Numerics
Presenting
in the Thousands (000's)
Exposing
Dollars and Cents
Projects and Economic
Order Quantities - Intro.
Creating
a Financial Project
Adding
Financial Project Detail Items
Assigning
Non-Financial Account Types
Building
Project Item Forecasts - Example One
Free (to Many) Profit Plan v2001 UpDate Release
Ordering the Profit Plan v2001 Upgrade/Update
Topics Coming in the April Issue
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Profit Plan Training Classes
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Thanks to all of you who so kindly responded to our web-site training
page survey. If you
didn't have a chance to provide your own feedback, please feel free to
do so now.
As a result of the survey and in deference to our many CPA
and financial advisory clients,
(who are always swamped in the Spring), classes are scheduled for
late June. A formal mailing
in April will provide all the details.
What a great way to get away from the noise for awhile so we can truly focus on planning!
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Functional Cosmetics - Numerics
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Yes, there really are valid reasons to think about the way numbers are
displayed in your
financial statements. The appearance of the numbers is called
their "format". Are cents
included? Does the $ sign show? Are the values rounded?
We will spend a little time in this section discussing why you might
wish to use different
numeric formats for different purposes and how to achieve them.
Presenting in the Thousands (000's) top
One of the things to keep in mind when building and presenting a financial
plan is that the
forecast numbers are ALWAYS estimates. True, some estimates are much
better than others,
but simply showing every estimate to the nearest cent does not make the
story more
credible. Indeed, the astute presenter may well show all values only to
the nearest
thousand. This lets the audience know that the presenter knows the plan
is a reasonable
estimate only and seldom accurate to dollars and cents. And it lets the
audience know
that the presenter knows the audience knows this also!
If this is so, why prepare plans to the nearest cent? The answer is
simplicity. If all things
are computed to the nearest cent, there are never rounding errors and time
wasted trying
to figure out why the totals don't balance. So the rule is: enter data
and plan to the
nearest cent, for simplicity. But sometimes it may be worth applying a
little cosmetics to
the results before presentation...
All versions of Profit Plan have had the ability to automatically display
values shown on
financial reports rounded to thousands of dollars automatically.
For example, a historical
Sales value in 2001 could be computed and totaled as $12,349,244.63 but
displayed as
$12,349. Of course, if the value were $12,349,500.00 or more, the
value would be rounded
up to $12,350 before display. (In either example above, dispay of
the "$" itself was optional.)
Remember: What we are discussing
here is "presentation " only. The underlying numeric
values continue to be computed and stored with dollars and cents included.
So what is the quickest way to convert the display so the Financials
are presented in
thousands? The very simplest procedure is as follows:
(1) Click in the upper left "frozen" area of the form or report
(2) Click the "Custom Format ..." button (last one on
Numeric toolbar).
(3) In the text box above the "Category" dropdown list,
enter one of the following patterns:
(a) "#,"
<= shows numbers greater than + or -499.99. Those rounded to
0 display as blank.
[Ex: 500.00 rounds to 1 (thousand). 499.99 rounds to 0 (thousands),
so is blank.]
or
(b) "#,##0,"
<= same as (a), but includes zeros, plus commas in millions.
[Ex: 400.89 rounds to 0, so 0 shows. 12,345,123 rounds to 12,345.]
or
(fanciest)
(c) "#,##0,_);[Red](#,##0,)" <=
same as (b), but will show negative numbers in red font
enclosed within parentheses. Like (5,432).
(4) Click OK to apply it. (Once one of these patterns has
been entered, it will appear in the
Custom Format dialog later for you to choose again, if you wish.)
NOTE: If you apply this formatting to the Assumptions Sheet, it will
automatically carry over
to the associated standard Income Statement and Balance Sheet reports.
To use this
technique on another report, apply directly to it, but ONLY if the report
does not include
ratios and percentages.
Exposing Dollars and Cents top
OK, so we can convert to thousands, but how to undo this later?
Use this Numeric Toolbar.
The Numeric Toolbar provides other conveniences besides quick access
to the numeric
Custom Format dialog. This is how to use the other buttons you find
there.
First select one or more values to be numerically formatted. If a single
value is selected,
Profit Plan v2001 may ask if the format applies to the entire report. If
a range of values
(cells) are selected, however, it knows you want ONLY to format those selected.
The Numeric Toolbar buttons work as follows:
The last button on this toolbar opens the Custom Format dialog, as mentioned before.
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Projects and Economic Order Quantities
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Last month we said we would begin discussing how to use Projects to
enhance your
planning experience. So here we go...
The "Project" we are going to discuss will be built using
the old Johnson Supply sample
model. If you can't find it via the File / Open dialog box in Profit Plan,
you probably deleted
it. You can retrieve it from your CD-ROM by following the process in the
December, 2001
Newsletter. (See Browsing Old Newsletters below for help.)
Johnson Supply's chart of accounts conceals all detail information about
the product lines
they handle. But now this construction materials supply house is going
to consider adding
a new line; prefab storage sheds. If they can sell them though their builders,
as well
as direct to the public, the line might be worthwhile. But some planning
is needed!
To decide whether or not to add this new line, some major questions
need to be answered.
What is the demand schedule? What is the lead time for orders? How much
inventory
is needed for display and contingency? How will this new inventory be financed?
Who
needs to be trained? What impact will there be on advertising and support
budgets? Etc.
Creating a Financial Project top
To begin the planning process, let's start at the top of the Annual Assumptions Sheet.
Place the cursor anywhere on the Sales account line financial data.
Select from the main
menu, Input / Project Creation . (This will add a new "Planning
Item" immediately BELOW
the Sales account, and allow us to create a new project at the same time
In the "Add Project Definition / Detail " dialog, fill in the following information:
Project Title: "Add
Garden Shed Product Line"
Project ID: "Sheds"
Detail text: "This project includes all significant impacts
anticipated from the addition of
a Misumi steel garden shed line beginning July 1."
Press "Add/Edit" to create the Project. (When
adding items later we can select this project
again by selecting it from the "Title" dropdown list. The detailed
text above will help us
remember why we created this project in the first place.)
Since the project does not yet exist, we will be asked if we wish to
create a new project
named "Sheds::Add Garden Shed Product Line".
Click OK to create the project. This
will open a new Project Sheet for us in the Project Financials
tab within the BizPlan Module.
Just for the heck of it, let's take a look at the "project"
so far. Click on the Planner button
at the lower right of the Add Project Definition / Detail dialog to peek
at how this new project
looks in the Project Financials window in the BizPlan module.
In the Project Financials window, use the Left Arrow
key if you do not see the full project
title (::Add Garden Shed Product Line) in the window. Now place your cursor
at the lower
edge of the window. When the mouse pointer turns into a horizontal double
bar, press
the left mouse button and drag down until you can see the "Sheds"
tab at the bottom of the
Project sheet we just created.
Since we have only just created this project, there is nothing much
to see except the
title and description so far. So let's return to the Assumptions Sheet
to add more detail.
To do so:
Click the Assumptions Tab. The Add Project ... dialog reappears.
Now let's add a new project item to carry our anticipated sales from
garden sheds. This will
be inserted directly into the Chart of Accounts and Assumptions Sheet,
as well as into the
Project Financials sheet we just visited.
Enter into the remaining fields in the Add Project / Detail form the following item information.
"Item's Account Name: "Sales - Garden Sheds"
"Line Item Description: "Annual Sales forecast
for new Misumi Garden Shed Line"
NOTE: The new planning
item account is available in all planning horizons. Each
"View" within the model (Monthly, Annual, etc.) will have a correspondings
Project Financials
sheet for every project you create.
Click OK to create the Sales - Garden Sheds account and return to the
Assumptions
Sheet. We immediately note that our new planning item is
now immediately below the
original Sales line and has taken on it's attributes (account type, font,
etc) The cursor has
been moved to the first planning (forecast) column of the new item.
And, finally, we see that
the item's Line. No.column has been assigned an asterisk
"*". The asterisk indicates that the
item does not currently exist in the firm's formal chart of accounts.
Adding Financial Project Detail Items top
Now that we have a Sales line to forecast, we ask ourselves how? Well,
first let us
consider our builder market.
By checking old data, we hand-calculate that our builder customers put
up roughly 1200
homes per $1 Million of historical sales we see from them. We also
have learned from
interviews that dealers in other areas find 5% of the builders add garden
sheds to their
new homes. But, since we are new at this, we may want to vary
that percentage as we plan.
In Profit Plan, it is often convenient to create a new planning line
item to hold estimates of
anything that may be variable and affect the bottom line. So, in
this case, we will create a
new variable planning item called "Builder Participation - %."
We can then use this to carry
variations in our builders' participation in the garden shed market and
compute other effects
that result from possible changes in that participation.
To add this new planning line item, make sure your cursor is still on
the Sales - Garden Sheds
line. Then right-click and select "Insert Planning Item". (We
are going to add our decision
variable right below the new sales dollars line for garden sheds.)
When the Add Project
Definition / Detail dialog appears, enter the following:
Item Account Name: "Builder
Participation - %"
Line Item Description: "Anticipated % of builders who install
garden sheds in new homes."
Click OK to return to the Assumptions Sheet.
Now we want to add a line item that allows us to improve our marketing
skill at selling the
garden sheds into this market: Right-click again and "Insert Planning
Item" data again:
Item Account Name: "Builder
Market Penetration %"
Line Item Description: "% of Builder market that buys from
us."
Click OK. Then right-click and add the following planning item:
Item Account Name: "New
Homes by our Builders"
Line Item Description: "Number of homes we think our builders
will install this year"
Finally, to figure out the sales volume, we need a pricing line. Add the following new item:
Item Account Name: "Average
Unit Sale Price"
Line Item Description: "Average price we anticipate getting.
(On monthly forecasts, we will
adjust this for sales promotions and clearance requirements.)"
After a final "OK ", we are ready to begin making use of these planning items.
Assigning Non-Financial Account Types to Financial Project Detail Items top
Before we start entering assumptions for these new planning items/accounts,
let's pause
to consider just which lines should impact our bottom line financially,
and which ones
are there simply to give us greater control over the planning process itself.
We know that
Profit Plan builds cash flows by using the account type of each item in
the Assumptions
Sheet. So let's make sure we let Profit Plan know what we want...
Click the View Accounts button on the main toolbar to switch to this
set of accounts in
the Account Setup tab. (If you have an older edition of Profit Plan,
click the Account
Setup tab and scroll to find these.)
Now, notice that each planning item assumed the account type and format
of the account
immediately above. Two things are wrong. The accounts are pretty ugly in
bold and, more
importantly, anything we enter into any of them will add directly to Total
Sales! So let's fix...
Select the Builder Participation - % through Average
Unit Price account names. Then
click the Bold button to turn off the bold font. Ok, that was easy.
Now let's fix the account types so these lines will not DIRECTLY contribute
to the overall
sales projections. Right-click and select Edit Account . Click
the dropdown arrow and
scroll to the bottom of the list. Select "Non-financial Level".
Then click OK.
Because we have four lines selected, Profit Plan will warn us that the
selected account
type is going to be applied to all of them. This is exactly what we want,
so click OK .
More about Non-financial Account Types top
There are two basic "Non-financial" account types; "Rates"
and "Levels ". Neither type
contributes directly to cash flow and can be used anywhere in the chart
of accounts. But
there is one KEY DIFFERENCE.
Non-financial "Rates" carry periodic values, (like Units per
month) and are summed across
each year when inserting Annual Totals into Monthly reports. For
example, if one were to
forecast 100 homes per month, the Annual Totals column would show 1,200
homes.
Non-financial "Levels" carry balances or values at a given
point in time. In an Annual
Totals column, the last period's value is displayed instead of an annual
sum. For example,
Average Price values in a Monthly report would indicate the price in a
given month. The
Annual Total value would simply repeat the Average Price for December,
not a sum of
the price averages.
Incidentally, SubTotal accounts are treated exactly the same as "Non-financial
Rates".
They just have the added advantage of an easy "pick-list" approach
to creating summary
totals for display purposes. They NEVER directly contribute directly to
cash flows.
Finishing up the Project Account Types. top
With the above in mind, let's rethink the Non-financial level assignment
we used above.
Builder Participation - % relates to each period. We wouldn't
add a 5% participation by
month to reach a 60% participation for the year. Similar logic applies
to Market Penetration
and Average Unit Sales Price. But what about New
Homes by our builders?
On a Monthly basis, one would logically assume that the number of homes
built per month
could be added together to produce an annual volume of homes built. So
let's change
this account to a "Non-financial Rate" instead, so it will be
totaled over the year. This
is easy.
Select (click on) the "New Homes by Our Builders"
account. Right-click and open the
Edit Account window. Click the Acct Type dropdown list and
select Non-financial Rate .
Click OK. The planning items are ready to go.
Just before we leave the Account Setup tab, let's make one final adjustment.
While we
do want these planning items visible on our Assumptions Sheets and in Project
Financials, we may not want all this detail available on our Show 'n Tell
reports. So let's
hide them on the reports:
OK. Now the accounts are hidden on the associated "R"eports.
Building Project Item Forecasts - Example One top
Now that we have the new planning items set up properly, let's fill
in some values for them.
Return to the Annual Assumptions Sheet by clicking the View Assumptions
Sheet button
or clicking the Assumptions main tab.
Let's begin by entering our 5% assumptions for Builder Participation
in the market. Simply
enter 0.05 into the 12/1997 column. Of course since the
sheet is locked and this is a
forecast period, we will get a message that the sheet is locked.
Click OK to unlock it.
Then enter the 0.05 again.
To make the value show as a percentage, place your cursor on this value
again and then
click the % button on the Numbers toolbar.
Because we currently have 30% of the local Builder Market in other major
products, let's
assume we can achieve 20% penetration this year and 30% next. Enter
0.2 into the
Builder Market Penetration % line for 1997. Then move back
up and click the % button.
We think our average introductory pricing level will be $1,036 per shed.
Enter this for 1997.
Move back up and click the "$" formatting button. This
time, since we have not selected
a range and we have chosen a dollars and cents type format, we are prompted
with a
question allowing us to apply the $ everywhere. But we really want
it only for this cell, so
click NO to continue.
The remaining two items to compute are theNew Homes by Our Builders
, and the bottom
line,Sales - Garden Sheds . So hold down the Ctrl
key and click each of these two
items in the 1997 column. Then right-click and open the Assumptions
Designer.
First we need to compute the New Homes ... line, so
select that account in the Accounts
to Receive formula... window. With that account now isolated,
change its Assumption
Type to % of Account. Then select 8:
Sales as the Account to Use in Formula...
list. Since we have entered no history for the New Homes
account, the default is 0%. But
we have already discovered (we think) from other data that our builders
average 1,200
new homes per $1M of our sales. So we want new homes computed as
120% per million
dollars of our usual Sales revenue lines. The Result (if apply) box
now displays 4,276.8
homes. Seems about right with $3.5M in sales, so click Apply
Now .
Now let's finally compute what all this means in Sales of Garden
Sheds for 1997. We begin
by selecting that account, isolating "Sales - Garden Sheds" in
the Account(s) to use in
formula... list. Now select the "User Defined
" Assumption Type. (If you see a "Quick Note..."
message, you can click "Cancel ". You now understand
what it says.)
Build the formula by clicking "13: New Homes.." account in
the Account(s) to Use..." list.
Enter a "*" sign after the "=I12" to make "=I12*".
Now click "10: Builder Participation".
This gives us the number of homes which will receive garden sheds from
the builders. Now
enter a times sign ("*") again. Then click "11: Builder
Market Penetration". This gives
us the number of garden sheds we anticipate selling in 1997. (Only
42.77 sheds, per
the "Result if apply" box.) Finally, dollarize this.
Enter another times sign("*") and click
the "13: Average Unit Sale Price". Now we see the "Result
if Apply" will be $9,408.96.
Not a big deal, particularly when we haven't considered the cost of
the sheds to us. But
the more we think about this, the more interesting it becomes. What
if we could get our
top two builders to install them in 30% of their homes, for competitive
reasons. They actually
make up 40% of our current market and they will buy them all from us.
So let's change the
formula...
Our top two builders build I12*40% of the homes we supply in the local
market. We think
we can increase their participation to 30%, so they will need and buy I12*0.4*0.3
sheds
from us. In addition, the other 60% of our builders will still use
I12*0.6*I10 sheds. Putting
all this into the Formula window, the formula becomes "=(I12*.4*.3+I12*.6*I10)*I11*I13".
And now the value is 428,226.84.
Finally, to convert this value to match the 1,000's data entry (we weren't
so smart back
then), we divide the formula by 1000, resulting in "=(I12*.4*.3+I12*.6*I10)*I11*I13/1000".
This will be our final estimate for now, so click OK to close the Assumption
Designer.
SUMMARY: This Month we've created a new project, exposed decision
and economic
variables that would affect one component of the project, and learned more
about
using account types, tool bars and the Assumption Designer. Next
month we will expand
this to show how to solve the question: What is the Economic Order Quantity
and
Economic Reorder Point for this product line. In the process, we
will also learn how to
constrain our assumptions so we are not shipping more than we have on hand!
For a copy of the Johnson model with the Project additions todate, feel
free to download
it by clicking here.
(It will only function with the Profit Plan v2001 Update Release, however.
See below.)
We will continue with this next month.
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Free (to Many) Profit Plan v2001 UpDate Release
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As you worked along with us in our newsletters, some of you may have
discovered that
your particular version of Profit Plan v2001 would occasionally behave
slightly differently
than the newsletter indicated. This is simply because we frequently add
small new features
and enhancements to the product over the year. Someone has a good suggestion,
so we
slip it in. Or something is a bit clumsy, so we smooth it out. And, of
course, all of these end
up in the next formal product release. But if you'd like, you don't have
to wait until then...
If you have a current Profit Plan Annual Technical Support policy, we
figure you deserve
a FREE update to your current copy of Profit Plan v2001. It's available
for downloading
from our web site. For the rest of our v2001 clients, we are also making
it available, but
for a very modest update fee of $49 per copy. (v2001 copies purchased after
12/31/01
are also updatable for free.)
This Update release includes the ability to automatically create an
adjustment to retained
earnings (just like your CPA) to handle prior year adjustments. And the
handling of multiple
SIC studies has been reworked to allow entry of multiple SIC studies without
leaving the
form, and to show which studies are in the current model (to travel with
it) and which are in
the Master Index (and available for all models.) Other nice
little features include being able
to move the toolbars out of your way, copy/paste directly between the Seasonal
Profile and
the Monthly Assumptions, an even smarter QuickBooks import, and many other
small but
nice touches. (See our New Features page for more
detail.)
This "Update" is exactly that. Unlike full-blown Upgrades,
this modest UpDate includes
ONLY the specific components updated and will NOT function without critical
items
shipped with your earlier V2001 release. It MUST be installed into your
current fully
functional Profit Plan v2001 working folder to operate. In addition, this
UpDate edition
includes an Authorization Password form, since it is available directly
from the Web.
To activate it, e-mail or fax in the Authorization Request sheet available
from that form.
Then click OK and continue into Profit Plan itself. The UpDate will only
run for three
days without authorization, so be sure to send in the form right away.
To download the update, go to our Update2001.html page.
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Ordering the Profit Plan v2001 Upgrade
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If you are not yet using Profit Plan v2001, you owe it to yourself to
consider upgrading before
you begin next year's budget or plan your next project. As always,
every edition is more powerful and
robust than its predecessor, as you can see for yourself by reviewing the
upgrade history available at
our What's New
web page. An order form is available from that page.
(Yes, the Profit Plan v2001 "Upgrade" Edition includes everything in the "UpDate" also.
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Browsing Old Newsletters
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If you want to review past issues of our Profit Plan Tips newsletter,
you can do so by
clicking this Newsletter
Index link.
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Topics in the April Issue
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In April, we will continue our planning example. We will use it to explore
the concepts of "Economic
Reorder Points" (ERP) and "Economic Order Quantities" (EOQ).
In the processes you will discover how
to handle real-world constraints, such as shipping lead times
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How to Opt-Out
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can say
"Thank you!" for being one of our valued Profit Plan® clients!
We hope you find that each
issue of our Profit Plan newsletter contains at least one nugget of information
that will help
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Copyright 2002 - Security Development Corp.
10406
- 40th Avenue SE
Everett,
WA 98208 USA
tel:
(425) 483-0850
fax:
(425) 483-0683
sdc@sdc-usa.com