When running a
business, it is critical that the profitability, or contribution margin, of a particular service or product sold is known. Furthermore, where sales representatives have discounted the sales prices for specific
customers, it is also very important to know what the profit margins are for each customer.
The term Contribution Margin is used intentionally instead of Gross Profit so as not to detract from the role of the
accounting system in determining overall profitability. However, it essentially means the same thing and is used in this instance to refer to the profitability of a service or product sold using CentreBill.
The
CM module is also used to track and report on the performance of each sales representative and each department. Furthermore, the module tracks and differentiates performance based on new and existing customers in the
system.
Company Allocation versus Staff Allocation
As a performance based organization, it is important to define the business rules for paying commissions and bonuses up front and then working
consistently, accurately and in a timely manner to these business rules. The ability for staff to measure and monitor their performance in real time is an enormous motivator to increased performance.
The first step is to split the company income into two streams:
- Company Income
- Balance of Income available for Contribution Margin payout
The company configuration includes fields that determine the percentage of total income that is attributed to the company. Different revenue distribution split's apply to new contracts, retained contracts, and
ongoing contracts. New contracts are contracts within the first 'n' months, retained contracts are renewed contracts within the first n months, and ongoing contracts covers contracts active for more than n months where
n is defined as the contract length.
The available income for CM is split amongst the individuals in each of the company departments according to the type of service that the income was generated from.
Contribution margin (CM) is defined as:
The contribution margin is accrued to each of the individuals over a period of time according to a rule set defined for each charge frequency.
In the case of One-off charges, the CM derived from once-off charges is accrued to the individuals immediately the charge is raised. The CM derived from subscription income is paid for the duration of the service.
After a service's contract expiry, the subscription income may be divided differently amongst the various departments who are involved in supporting and maintaining the customer.
