Understanding the relevance of contribution margin for your business

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It’s simply not enough to be good at record keeping, for your business, to reach greater heights. You need to be able analyze whatever it is that you record. Inability to make sense of the financial records of a business is a sure way for unprofitability and failure to creep in.

Contribution margin is one of the many ways to assess your business performance. It’s measured by finding the difference between your selling price and the variable cost. You can measure the total contribution margin or calculate it per unit. When you are determining the price of your products or services, don’t limit yourself only to what the competitor is offering. Be selfish but only a little. Assess whether your business will survive at the price you’ve settled on.

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You see, the contribution margin shows you whether your activity of making products, selling products or offering services generates you income. It’s why variable cost is use to calculate it. Variable cost can only be incurred, in business, when you’re doing productive work. More production means more variable cost. Can you imagine if you’re contribution margin is zero or negative? 😂

It should never be low. That figure also has to cover fixed cost and remain just enough so you never sleep on a hungry stomach. If it’s low it means either one of two things: you need to increase sales or your business is not viable.

A healthy contribution margin frees you to conduct a breakeven analysis to get an even clearer picture on the viability of your business. We’ll share the secrets of breakeven point with you soon. Meanwhile, go through our top 10 articles of the last 12 months.

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