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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 - April, 2002

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April Contents:

      Profit Plan v2001 Update Release

      Functional Cosmetics
              Refreeze without Company Titles
              Nudging Account Names

      Projects and Economic Order Quantities - (Cont.)
              Project Review - Progress Last Issue
              Exposing Units Sold for Use With Cost of Goods Sold
              Adding Cost of Goods Sold Impact
              Computing Gross Profit for Multiple Product Lines
              Tip: How to Change Indent Spacing

      Upgrading to Profit Plan v2001

      Browsing Old Newsletters

      Topics Coming in the April Issue

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                            Profit Plan v2001 Build 1350 Update Release (website only)
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An update to Profit Plan v2001 is available for all of our current Profit Plan v2001 clients at our website. Download it at your convenience from our Update.2001 web site.  There you will find full particulars about how to install and activate it. For many of you this release will be FREE. For others, a very modest update fee may be involved.

The Authorization Password needed to activate your copy of a Profit Plan v2001 Update is unique to each of you and your company. But once issued, the authorization will remain active for any future Update release in the Profit Plan v2001 series.  So feel free to surf to our Update.2001 site periodically to see if you have the latest and greatest available! Simply compare the "Build" number displayed in your copy's Help / About dialog with that found on the site.

Currently the Update edition at the site is Profit Plan v2001 Build 1350.

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                                                Functional Cosmetics
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In keeping with our theme that cosmetics can be functional, we will briefly touch on two more "productivity tools" in this issue. Nothing fancy... Just useful.

Refreeze without Company Titles                                                                 top

Most of us wish PC screens had a lot more height. It always seems that we are peering into a periscope and can never see enough of the picture. Well, here is a quick way to see more of your Assumptions.

1. Click the Assumptions Sheet tab, to view one of the Assumptions Sheets.
2. Click the Freeze Titles button (or use Options / Freeze Titles with older editions) to allow full use of the entire Assumptions Tab.
3. Scroll the Assumptions and Data Entry sheet vertically until just the brown date header rows are visible.
4. Place the cursor (left-click) on the cell immediately below "Account Name" in the brown header rows.
5. Click the Freeze Titles button again.
6. Select "No" to establish this cursor position as the new intersection for frozen rows and columns.

So now the company title area will no longer take up precious vertical rows as you work on your assumptions. After all, you know what firm you're working on right now, right?

Later, when you want to see the title again (perhaps to add annotation there), simply reversethe process above... Unfreeze, reposition, and refreeze again.

Incidentally, unless you change your print area definition, the company title area will still conveniently print out for you, including the current date and time at the time of the printing.

.

Nudging Account Names                                                                 top

Many of us associate indentation with summary account levels. Indent once for the first subtotal. Indent twice for the second level, etc. Once the outline style is applied to a chart of accounts, the financial statements become both more intuitive and easier to digest.

With the advent of Profit Plan v2001, we introduced the "Increase Indent" and "Decrease Indent" toolbar buttons with a dropdown text box between them to optionally change the width of the indents. These early buttons worked OK, but someone suggested that it would be far more convenient if an entire block of accounts could be indented or "outdented" at a time. And so it is, in the Profit Plan v2001 Update.

There are several schools of thought as to the most appropriate way to structure a chart of accounts. We are not advocating any particular one. We just observe that a bit of judicial work with the Increase/Decrease Indent buttons can go a long way to improving the readability of your chart of accounts. (Of course in Profit Plan, this is carried over immediately into your associated financial statements without any extra work on your part.)

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                                Projects and Economic Order Quantities - (Cont.)
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Last month we began adding a new "project" to the sample "Johnson Industrial Supply" financial model. We hope you followed along, but if you missed that issue, please detour to the Projects and Economic Order Quantities section of our prior issue. There we touched on some key concepts... project planning, planning items, non-financial assumptions types, the BizPlan "Project Financials" window, and more.

Today we are going to pick up from there. And for those of you who didn't work through the discussion last month and would like to follow along this month, take the time to download the partially complete Johnson Supply.zip model and open it up in Profit Plan now. (You will need Profit Plan v2001 Build 1344 or later to load it properly.)

Project Review - Sales projected from Customer Sales Profile                                                                 top

To review our progress so far, open your copy of the partially revised Johnson Supply model. Now select the Input / Project Creation... menu option. This opens a form we can use to review all existing projects, add new projects, and/or add/delete planning items to existing projects. (This was automatically opened for us last session by simply choosing the "Edit / Insert Planning Item" menu option.)

In this form, we find one project in this model called "Add Garden Shed Product Line", which we added last month. Its Project ID indicates that all planning items associated with the project will be found gathered together in the BizPlan "Project Financials" window under the Project ID (tab) named "Sheds". If we wish, we could use the "Planner" button to go there from the current form and later click the Assumptions main tab to be automatically returned back to the open "Add Project Definition/Detail" form we are now viewing.

Checking the Detail Planning Item dropdown list, (or viewing the "Sheds" tab in Project Financials) will show us all planning items we have associated with the project thus far. They are:

• "Builder Participation - %"        - % of builders who include sheds in their new homes.
• "Builder Market Penetration"    - % of builders in area who are our clients.
• "New Homes by Our Builders" - Our forecast of homes our portion of builder market will install.
• "Average Unit Sale Price"         - Price at which we anticipate the penetration above.

With these items we proceeded to project the increase in sales volume that Johnson Supply might see on an annual basis if the garden shed product line is added. Now we will examine the other impacts one might expect from this effort.

 Exposing Units Sold for Use With Cost of Goods Sold                                                                 top

Last month we focused on forecasting garden shed sales and it looked like this could produce a viable revenue stream. Now as we look down the chart of accounts, we see the next obvious concern is the impact on cost of goods sold and gross profit. Once we have those under control and the project still looks viable, we will continue down the chart looking for additional impacts (next month).

For now, close the Add Project.... form, if it is still open. We see we have nothing yet in the project to handle new cost of goods sold impact, so we will want to handle this next.

After thinking about what we have available on the Assumptions sheet now and what we need to estimate future cost of goods sold, it seems clear that it would be really handy if we had a "Units Sold" line to hold a unit sales forecast. Then the dollar volume of Sales and the associated Cost of Sales could be compute directly from those units. So let's revise last month's work to accommodate this.

Add GARDEN SHEDS - UNITS SOLD

The Sales - Garden Sheds planning line inserted last month computed sales dollars by estimating unit sales and then multiplying by the estimated resale price. Lets add a new line to carry the unit computations for us. Then we can use the results of Cost of Sales (and perhaps inventory computations) later. To proceed,

1. Place the cursor on the "New Homes by Our Builders" account.
2. From the main menu, select Edit / Insert Planning item, or press Ctrl-I.
3. In the "Add Project..." form enter a new Detail Planning Item:
   1. Enter "Garden Sheds - Units sold" as the Detail Item's account name.
   2. Enter "Unit Sales volume projected from estimates of participation and penetration in the local market" into the Line Item description field.
   3. Click OK. The new line is available for use.

To check that our new planning item has exactly the account type we need, click the "View Accounts" button to go to this account in the Account Setup tab.

On the Account Setup sheet we see that our new planning line was automatically assigned a "Non-financial Rate" account type, copied from the line we chose to use as a "template" during the insertion. Great!  A non-financial rate account will carry Units/period values like our new "Garden Sheds - Units Sold" line, quite nicely.  And this account type will automatically total the units across the months for us on this line if we insert Annual Totals in the Monthly Assumptions Sheet. Perfect!  Let's use this line as is.

Click the "View Assumptions" button to head back to the first forecast period with this account.  Now earlier, we said that 40% of the new homes built in the local market are produced by two of our best customers and that early discussions with them led us to believe they will probably install our proposed garden shed line at 30+% of their new home lines which are uniquely suited to this amenity.  In addition, the remaining 60% of the market will have some average "Builder Participation - %", say 5% or more, based upon reported penetration of this product line within other regional markets.

Using this information, we will now proceed to build a forecast for garden shed unit sales:

1. Place the cursor in the "Garden Sales - Units Sold" line for 1997, if not already there.
2. Press Ctrl-E, to begin "editing" the assumption. The Assumption Designer opens.
   1. Select "User Defined" as the Assumptions Type.
   2. Click "12. New Homes by Our Builders" in the "Accounts to Use in Formula" list.
   3. Enter "*0.4 * 0.3" next, to compute the expected sales volume to our two prime builders.
   4. Follow this with "+ 0.6*" to begin computing the additional sales from the rest of the market.
   5. Click "10. Builder Participation - %" to include our estimate of how many of the other builders might be early adopters of our garden shed line (maybe 5%?).
   6. Enter a "*" to multiply this by our estimate of the total homes to be built.
   7. Click "12. New Homes by Our Builders" again.
   8. Press Enter to compute the answer and display it in the "Result (if apply)" window.
      
      The result shows 641.52 garden sheds! Now we could round this to 642 even, but why bother? Our estimates are simply estimates. No need to worry about exact units when the entire estimate is inexact anyway.
   9. Click OK to apply the formula and close the Assumptions Designer.

Update the SALES - GARDEN SHEDS line

Now that the unit sales estimate is isolated on a single line, it is much easier to discuss whether or not the forecast is rational and reasonable. In addition, it is now very easy to estimate the dollars sales in sheds and to easily see the impact of changing sale prices. So let's modify last month's Sales forecast approach to utilize the new Unit Sales line.

1. Begin by placing the cursor on "Sales - Garden Sheds" in 1997. -
2. Press Ctrl-E to begin editing the assumption.
3. Clear the current formula so only the "=" sign remains.
4. Click "!3. Garden Sheds - Units Sold" in the "Accounts to Use in Formula" list.
5. Follow the resulting cell address entry with a "*".
6. Click "14. Average Unit Sales Price"
7. Press Enter to see the result, if applied. The answer will be $664,614.72.
   
   Not to shabby! But remembering that our entire plan is estimated in $1,000s, we need to divide this total by 1000. So,
8. Add "/1000" to the end of the formula, to convert the result to $644.6 (thousand) dollars.
9. Click OK to apply the result and close the Designer.

Adding Cost of Goods Sold Impact                                                                 top

Now to estimate the cost of goods sold, we simply need a line to carry our best guess as to what we will be paying for the sheds and an additional line to carry the dollar result.

1. Place cursor on the Cost of Goods Sold line in 1997
2. Press Ctrl-I to open the Project Planning dialog.
3. Enter "COGS - Garden Sheds" as the Detail Planning Item's account name.
4. Enter "Cost of purchasing and warehousing sheds sold" as the line item description.
5. Click OK.

Because we selected the existing Cost of Goods Sold account for our template line, we already know the new item will have a Cost of Goods Sold account type. Perfect for carrying the cost of goods sold dollar line. But before we forecast that cost, we still need a line to carry the unit cost. Then we can forecast the dollar cost of goods sold by multiplying the unit cost estimate by the unit sales estimate.

To add a unit cost line, we proceed as follows:

1. Place the cursor on 1997 "Average Unit Sale Price" and press Ctrl-I.
2. Now enter the following for the new planning line we are creating:
   1. Detail Planning Item name: "Average Unit Cost - Sheds"
   2. Item Descriptions: "Average cost of purchasing and storage of sheds sold, including freight in."
   3. Click OK.
3. Now enter 620 directly into the "Average Unit Cost - Sheds" in 1997.

This is the price from our supplier for lots of 20 sheds delivered to our destination. (We will simply be utilizing existing warehouse space and currently underutilized manpower to receive, store and ship these new sheds.  So we will associate no other costs directly to the cost of sheds sold at this time.)

Finally, we estimate the dollar cost of goods sold. This is now easy.

1. Place the cursor on "COGS-Garden Sheds" in 1997 and press Ctrl-E.
2. Select the "User Defined" Assumption Type.
3. Click "13. Garden Sheds - Units Sold" from the "Accounts to Use in Formula" list.
4. Follow this resulting cell address with a "*".
5. Scroll down and click the "Garden Sheds - Units Sold" account.
6. Enter "/1000" to convert the cost to 1,000s.
7. Click OK to apply the result and close the Assumption Designer.

Our cost of goods sold for those units we anticipate selling is $384.9 thousand. Good. So how much is all this adding to our gross profit?

Computing Gross Profit for Multiple Product Lines                                                                 top

Many of you use an "ABC" approach to inventory management. "A" items represent your high value inventory and receive closest scrutiny. "C" items are purchased in bulk and managed in gross. Class B items fall in between.

Well, clearly the new garden shed line will be Class A for Johnson Supply. In fact it looks like this line may contriburt roughly 1/6th of the total sales volume!

To manage a Class A line, as a minimum one should be monitoring its Cost of Goods Sold (we're now covered there) and its Gross Profit. So let's "smarten up" the chart of accounts to do this for us.

First, we will add a planning item to carry the Gross Profit for our new Garden Sheds line. Then we will insert an account to carry the "other" profit from our ongoing basic business. The result will let us monitor the new product line, the "rest of the business", and their combined results.

Converting Gross Profit to Gross Profit - Other

First of all, a glance at the Gross Profit line shows that we have some really strange numbers displayed there now. Clearly we can't have $7,273 thousands of dollars of profits from ongoing sales of only $3,564 and garden shed sales of $685 thousand. So what is going on?

Place your cursor on the Gross Profit line and click the "View Accounts" button. Arriving on this same account line in the Account Setup tab, we see that the current account type for our "Gross Profit" line says "Gross Profit". Seems reasonable enough. But lets examine this further...

Press Ctrl-U to open the Edit Account window so we can review this account type. Hmmm. the Gross Profit account edit window includes a selection list much like a Subtotal account. The big difference is that Cost of Goods Sold accounts are subtracted, rather than added to the result.

As we look at the selection list, we quickly realize that the problem is not with the account type, but rather with what is selected. As we added each new planning item above this original Gross Profit account, the item was also automatically inserted into the Gross Profit computation itself. But since we inserted a mix of prices, costs and non-financial elements, not all of the new lines really belong in the computation. So let's straighten it out, after we decide what we really want this account line to show.

Since we still want an account line that shows the gross profit for the "other" (non-shed) sales, let's fix this account up to show only that. Then we will add more lines for the garden shed an a grand total.

1. Scroll to the top of the selection list in the Edit Account window.
2. Click the "+ Sales" account. This clears all selections except that account.
3. Now scroll down until the original "Cost of Goods Sold" account is visible.
4. Press and hold the Ctrl key. (This allow selection of individual accounts.)
5. Click the "Cost of Goods Sold" account in the window. It highlights and a minus sign (-) appears to its left, indicating it will subtract from the sales lines when the gross profit is computed.
6. Next change the "Acct Name" from "GROSS PROFIT" to "Gross Profit - Other".
7. Click OK.

This line will now compute Gross Profit - Other as Sales - Cost of Goods Sold. It can also be used now as a template for the garden shed gross profit line. But some cosmetics are in order right now.

1. Click the "Gross Profit - Other" account name so only the name itself is selected.
2. Click the "B" button to turn off the Bold font previously applied to this account.
3. Click the "Font Size" down-arrow and select the "8" point Arial font.

Tip: How to Change Indent Spacing
 

1. Click the dropdown arrow between the Increase Indent and Decrease Indent buttons.
2. Check the "Spaces" text box to see how many spaces are currently added or removed per click.
   
   The Johnson Supply model typically used "3 spaces" per indent, while the current default is more typically "4" today. To to maintain consistency within the model, if the spacing is not currently "3", change it.
3. Drag across the "Spaces" entry field to select it and then enter "3" if not there already.
   (Or you can place the cursor behind the "4" and backspace to clear it before entering the "3".)
4. Press Enter to save this new setting.

Once the spacing has been set, click the "Increase Indent" button twice to move the renamed gross profit to the right six spaces.

Now that this line has the correct account type and cosmetics, we can handily use it as a template for creating the new Garden Sheds gross profit planning item. To do so, begin by placing your cursor on it and the click then "View Assumptions" button.

Adding the Gross Profit - Garden Sheds planning item

We are now back in the Assumptions sheet with our cursor on "Gross Profit - Other" for 1997. The value there is now 1,247, a much more reasonable answer! So our fix up to the old gross profit account is now yielding good results. Next,

1. Press Ctrl-I to insert a Gross Profit - Garden Shed account.
2. Enter "Gross Profit - Garden Sheds as the Detail Planning Item name.
3. Enter "Estimated gross profit on new garden shed line." as the description.
4. Click OK.

Now that we have the planning gross profit line for garden sheds, we need to figure out how to compute it. Easy. We just select the appropriate planning item lines from the Edit window in Account Setup. To get there, click the "View Accounts" button.

To set up the Gross Profit calculation, we:

1. Press Ctrl-U, to update this account.
2. Scroll to the top of the Gross Profit selection window. OK! The "+ Sales - Garden Sheds" indicates this line will add into the Gross Profit just as we hoped. Next...
3. Scroll back down the window to check out the "COGS - Garden Sheds" account.
   
   Ok, it is highlighted and sports a minus sign so we know it will be subtacted from the sales. Pretty smart so far! But we also notice that our template account "+ Gross Profit - Other" is also highlighted and included in the new gross profit calculation. This would be exactly right, if we were trying to compute Total Gross Profit! But what we really want on this line is only the gross profit for the garden sheds alone. We will add a separate total later. So,
4. Hold down the Ctrl key.
5. Click the "+ Gross Profit - Other" account to remove it from the calculation.
6. Click OK. We now have a good Gross Profit - Garden Sheds line.

Finishing up the Gross Profit accounts.

Now that we have accounts showing the "Other" products gross profit and that for garden sheds, what about the total gross profit? We would like to know this value no matter how many product lines we end up tracking. So let's add an account to handle this now.

While still on the Account Setup sheet,

1. Move the cursor to the line below the "Gross Profit - Garden Sheds"
2. Press Ctrl-A to add a new line.
3. Now click the Acct Type dropdown arrow and select the "Gross Profit - Total" account type.
   
   (Since the Account Name field was empty when we did this, that field was filled in with
   the account type. This will work perfectly as an account name for our purposes!)
4. Click Ok.

The "Gross Profit - Total" account type always adds all Gross Profit Accounts together, if there are any gross profit lines. Otherwise it computes total gross profit directly from the values in all sales and cost of sales lines found in the chart of accounts.

So now this portion of our project is complete. We can project in detail the impact of our garden shed "project" down through total gross profit. But as we look at the chart of accounts, it seems a little hard to read.

Cleaning up Accounts from Sales through Total Gross Profit

Let's take a moment to apply some cosmetics to make the results of our work to date just a little more readable.

1. Place the cursor on the bold "Sales" account.
2. Press Ctrl-A to add a blank line.
3. Select "No" in response to the "Wish to include new account(s) in Gross Profit?" dialog that automatically appears when we add an account above a Gross Profit account.  The line we are adding is just a header and needs not be included in the calculations.
4. Now enter "Sales" as the "Acct Name" in the Edit Account window.
5. Click OK. (The account type defaulted to None, since there were no defined accounts about this position. And this was just what we needed.)
6. Click the Bold button and set the font size to "10" points, to finish up the heading.

More Cosmetics...

Move down one line and change the original bold "Sales" line to "Sales - Garden Sheds".

Next, to clean up the ragged indents, select all the account names from "Sales - Other" down to "COGS - Garden Sheds", so they are all highlighted. Now "Decrease Indent" until all these lines are tight against the left margin. Then use "Increase Indent" once, to uniformly indent them all three spaces in from the larger "Sales" heading.

Next, click the Bold button On, then Off to insure all the selected accounts are non-bold.

Finally, set the Font to "8" points so these all have a uniform appearance.

Now place the cursor on the "Average Unit Cost - Sheds" line. Press Ctrl-A and then the "Esc" key. Do not include this new line in the gross profit accounts when prompted. Then enter "Cost of Goods" as a new section heading. Select Bold and "10" point, so we can find this section easily later. "Outdent" (decrease the indent) until this heading is flush with the left margin, if necessary.

Next, place the cursor on the "Gross Profit - Other" account and press Ctrl-A. Then hit the "Esc" key to create a blank line with nothing on it. This gives a little visual separation between the cost of goods accounts and the gross profit accounts.

Select all three gross profit accounts. Outdent them to the left margin and then indent them 6 spaces (two Increase Indent clicks).

Finally, select the "Gross Profit - Total" account and Increase Indent once more. Make this total account bold and we're finished for now!

More next month.

At this point we have reasonable sales and cost of sales estimates with enough detail built right into the Assumptions Sheet to illustrate the underlying elements in this portion of the project to others (and ourselves in the future, when we have forgotten the details.)

We now have a good handle on how to use non-financial accounts to build up the underlying assumptions in a sales forecast and how to bring this down to the gross profit line. But much remains. We have yet to explore how this project will affect such high impact items as increased inventories, increased payables, receivables and perhaps new loan requirements. And we still haven't concerned ourselves with how such issues as order quantities, volume purchase discounts and freight costs impact the overall economics of the project and the overall firm!

If you would like to compare your solution so far against ours, feel free to download a copy of   Johnson Supply Project - phase 2.zip now.

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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 May 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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Copyright 2002 - Security Development Corp.
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                             Everett, WA  98208  USA
                             tel:  (425) 483-0850
                             fax:  (425) 483-0683
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