This may seem obvious but is often misunderstood. If you reduce a business expenses by one dollar, how much net income will increase? (ONE DOLLAR)
If your marketing department comes to the executive team with a program that will spend $1 million dollars and bring in $2 million in sales, how much net income will you bring in?
The answer depends upon a financial term that is often misunderstood – CONTRIBUTION MARGIN.
Jim Pack UT took away from Dale Richards Valuation Presentation on key business concepts from Dale Richards’ presentation on Business Valuation Principles – How to Increase Your Business Value, Financially, Operational and Strategically.
Almost all businesses track REVENUE, COST OF GOODS or SERVICES with the resultant – GROSS MARGIN. However, there is a principle called VARIABLE COSTS.
A variable cost is one that is proportional to revenue. Meaning, when revenue is created, then an expense is triggered and occurs. There are many hidden costs that are accounted for in administration or overhead costs that are actually tied to revenue and should be in a category called “Variable” costs.
When all of the variable costs are subtracted from GROSS MARGIN, then a magic number happens called the Contribution Margin (CM)
Once the CM is calculated, it is a magic number to determine the break-even for the company, division, project, department or other category. I go into the concept of Contribution Margin (CM) in my book Business Valuation Principles.
Learn more about Business Valuation Principles by Dale S Richards https://successbiznow.com/books/business-valuation-principles-by-dale-richards/
ABOUT DALE S. RICHARDS:
Preview Dales presentations: Watch Dale In Action Dale S. Richards specializes in management, marketing, operation optimization & business valuation consulting and is a 25+ year turnaround expert. He has implemented success concepts into results in 150+ companies. Dale is a Certified Valuation Analyst (CVA) with NACVA, a Vistage International CEO-Board Chair in Utah and a World and Vistage International Speaker. Visit www.successbiznow.com to learn more about Dale and business valuation services.