PROMISE Business Financial Modeling August, 2011

The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS  “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 E XECUTIVE F ORUMS

 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 E XECUTIVE F ORUMS

Contribution Margin Pricing (CMP) The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS Fixed Expenses Revenues Max Profit 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 E XECUTIVE F ORUMS

 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 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 E XECUTIVE F ORUMS

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 E XECUTIVE F ORUMS

 “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 E XECUTIVE F ORUMS

Building Blocks – Basic Template The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS Sales -Variable Expenses =Gross Contribution Margin Fixed Expenses Minus Net IncomeEquals

“Slicing & Dicing” - Executive Forums The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS CEO ForumsKey Forums Higher Gross Contribution Margin % Lower Gross Contribution Margin % Total Gross Contribution Margin $ Fixed Expenses MinusCapacity Utilization % ? $ Net IncomeEquals

“Drilling Down” - Executive Forums The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS CEO Forums Key Forums Gross Contribution Margin $ Fixed Expense $ Net Contribution Margin $ Total Net Contribution Margin $ Minus Capacity Utilization % ? Fixed Expense $ MinusCapacity Utilization % ? $ Net Income Equals

“Slicing & Dicing” - Executive Forums The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS Customer Group A CEO & Key Highest Contribution Margin $ Customer Group B CEO Only Highest Contribution Margin % Customer Group C Key Only Lowest Contribution Margin % & $ Total Gross Contribution Margin $ Fixed Expenses $ MinusCapacity Utilization % ? $ Net Income Equals

 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 E XECUTIVE F ORUMS

 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 E XECUTIVE F ORUMS

 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 E XECUTIVE F ORUMS