The difference between a gross margin and a contribution margin
You can gauge the success of your company operations, and facilitate continued growth, by generating monthly or quarterly profit and loss statements. Two key metrics revealed in a comprehensive profit and loss statement are gross margin and contribution margin figures. Since these two metrics each provide very different information about your small business operations, you must understand how to calculate and utilize these figures to ensure the financial standing of your company. Read on to learn more about the differences between gross margin and contribution margin calculations.
Gross Margin Basics
Gross margin figures represent the gross profit of your net sales over the course of the measured time period. To calculate this figure, you must subtract your fixed and variable production costs from your sales totals. Make sure to account for all of your expenses in your calculations, including employee salaries, utilities, rent and equipment depreciation, along with the materials used during the production process.
Gross margin calculations allow you to gauge the overall profits made on your products after accounting for all of your business expenses. When used in tandem with contribution margin calculations, gross margin numbers can help you streamline your operations to increase profits and facilitate growth over the years.
Contribution Margin Facts
The contribution margin represents the profit margin on your products after eliminating variable production expenses. Unlike gross margin calculations, you will not include any of your administrative expenses, such as rent, utilities and salaries, in your production cost figures. Simply subtract your variable costs, such as production materials, from your sales figures.
This calculation will give you a clear idea about how much profit you make after removing production expenses from the equation. As you make changes to your production operations in Missouri, you can gauge the effects on your profit figures in real time by utilizing the contribution margin calculations.
Performing the Calculations
Continued generation of profit and loss statements will give you a clear look at the past and present financial health of your company. To ensure you always have highly accurate statements on hand, acquire the accounting expertise of the professionals at accountRely in St. Louis, MO. Your accounting pros will utilize your exact performance figures to generate the financial documents you need for the improvement of your small business operations.