The contribution margin income statement is undoubtedly one of the main metrics of a business. Contribution Margin is an economic-financial indicator capable of telling exactly if a company’s revenue is sufficient to pay fixed costs and expenses and, even so, profit. This is fundamental information, not least because sales volume is not synonymous with profitability. Sell and have the feeling that the store is not generating as much fruit as expected … Not being able to pay the bills … And even not knowing the viability of the venture are symptoms that your contribution margin needs to be urgently reviewed. In this article, you will know, in detail, how to find the contribution margin, know the information you need to have in order to define it properly and understand how to use it for the development of your business.
WHAT IS CONTRIBUTION MARGIN INCOME STATEMENT
First of all, however, it is necessary to understand what the contribution margin is.
But why this name: contribution margin income statement? This has a meaning:
Margin – because it is the difference between the Sale Price (sale price) and the Values of Costs and Expenses specific to these Sale, that is, values also known as Variable Costs and Variable Expenses of the sale. Contribution – because it represents how much the sales value contributes to the payment of Fixed Expenses and also to generate Profit. Also known as gross gain, the contribution margin represents how much the profit from the sale of each product will contribute to the company covering all its costs and expenses – called the structure cost – and still generating profit. Based on this, you can calculate the minimum quantity of products that you will need to sell in order not to lose out. To find this indicator, just follow the contribution margin formula, which is the value of sales, less the value of variable costs and expenses:
Contribution Margin = Sales Value – (Variable Costs + Variable Expenses)
The contribution margin is the profit obtained by the difference between the selling price and the variable costs of the product and its general formula is:
MC = PV – CV
- MC – Contribution Margin;
- PV – Selling Price;
- CV – Variable product cost;
Therefore, the margin is how much will be “left over” from the sale price, after subtracting the variable costs and expenses (costs of sale, raw material, taxation) from the product, this value will be the gross profit from the sale and should be used to pay fixed costs and expenses. There is a lot of work to be done and for that, I have listed some actions you should take for yesterday:
- You have recorded all product costs;
- Control your indicators (We will talk about this later);
- Perform constant analysis of your margin (The market reacts to your price).
HOW TO CALCULATE THE CONTRIBUTION MARGIN
How to calculate the contribution margin correctly requires knowledge of some basic concepts. The first one is the difference between costs and expenses. Basically, costs are all the values necessary for the manufacture and development of the product offered by the company. Since the expenses are related to expenses that do not directly impact on the product. You should already know that this metric is the difference between selling price and variable costs.
In terms of visualization, we have its formula:
Contribution Margin (R $) = Sales price – Variable costs and expenses
To find the percentage of each sale that is gross profit , just follow the calculation:
BMI = Contribution Margin Index = (Contribution Margin / Selling Price) * 100
WHEN TO USE CONTRIBUTION MARGIN
Knowing the contribution margin that sales provide is fundamental to the planning of any company and is essential to be able to make the best decisions. Especially if we consider that it can be set as a goal when defining the selling price of products and services. If the contribution margin is not known, you may be selling a lot and still have a loss. This is because this number to ensure the coverage of fixed costs and generate profit after the company reached the break- even point , also known as break – even point (break-even point). Based on the contribution margin, you can plan your promotions, set sales team goals to pay off specific products, adjust the price of items that have a lower margin, among other pricing-related decisions. Read also Accounting and its important terms?
Understanding why the name contribution margin is easy, even because the explanation is quite logical. Margin refers to the difference between the sale value (sale price) and the values of specific costs and expenses of these sales, also known as variable costs and variable expenses of the sale. In turn, contribution represents how much the value of each sale contributes to the payment of fixed expenses and also to generate profit.
However, more important than understanding the reason for the name of this concept, is knowing when to use it. And the truth is that there is no general recommendation as to when is the best time to use this calculation. However, it is very important when developing the company’s budget planning for the next period, for example. The contribution margin can also be accessed by setting monthly sales targets for the team responsible for this activity, when planning offers or readjusting prices. Without a doubt, tracking the result of this calculation will give your company much more resources to manage finances with more confidence and discretion. The sales result also has every potential to contribute even more effectively to the expansion of the business and, in some way, even the customers will be more satisfied, since it will be easier to plan interesting promotions.
So, incorporate the calculation of the contribution margin into your company’s management routines as soon as possible! Combined with other management techniques, your business grow with more sustainability and security.