Smart in 60 seconds! Today: The contribution margin.

And now the next instalment in our new series in the "The agency bloggers". Short, concise and practical,here we explain the most important terms in agency controlling. Today: The contribution margin.

Recently we discussed direct costs and overheads here. Both are important factors to determine agency success. The other is revenue - i.e. the customer budgets or projects. Subtracting the revenues from the directly attributable direct costs, one obtains the contribution margin I.

In practice that means that the proceeds from a project are set against the external (third-party) costs (e.g. for suppliers). The difference is the contribution margin I. The higher it is the more profitable the individual customer or project is.

However, to consider only the contribution margin I says nothing about the profitability of the entire agency. For this purpose, the overhead costs must be included in the calculation. Because: Despite a high contribution margin I, the profitability of the entire agency can suffer when the overheads are too high – e.g. the rent or salaries. Therefore: To get a truly meaningful picture here, the pro rata overheads must be subtracted from the contribution margin I. The result is the contribution margin II.

Agencies that outsource their entire controlling to tax consultants have a disadvantage here: As a rule they get their calculations delayed. We are happy to inform you which agency software guarantees you an overview in real time.