Contribution margin accounting is a crucial tool for analyzing the coverage of a company's fixed costs. It describes the difference between sales and variable costs and provides information on how much money is available per product unit to cover fixed costs.

Why is calculating the contribution margin important?

Contribution margin accounting makes it possible to divide the various cost items into three groups: fixed costs such as rent, variable costs such as materials and sales. The contribution margin shows how much money is still available to cover the fixed costs after deducting the variable costs.

For a financially healthy company, it is crucial that an attractive profit remains after the fixed costs have been covered. A solid contribution margin calculation is therefore an important element in showing a potential investor that the business plan is plausible and promising.

What is a contribution margin target?

The contribution margin target is a term that is used primarily in marketing. It describes sales targets for various products that are formulated depending on the variable costs. These targets can also be presented as part of financial planning.

A company with only one product will usually aim to increase sales of that product in order to achieve a higher contribution margin. Companies with multiple products should aim to sell as many profitable products as possible, while less profitable products can be positioned as prestige products, for example.

Conclusion

When calculating the contribution margin, we can't just roll whatever numbers we like. We have to look at the operational framework and think from the bottom up, ie from the operational business into the strategic planning. This is the only way we can calculate a realistic contribution margin and convince banks or partners that our planning will hold up when implemented.