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Guide to Contribution Margin Income Statements

Guide to Contribution Margin Income Statements
Susan Guillory
Susan GuilloryUpdated September 8, 2023
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When looking at your business finances, you want to pay attention both to the revenues coming in and the money going out to pay expenses. However, not all expenses are created equal. Some are the same every month, while others vary. Seeing the bigger picture of the flow of those expenses can be incredibly helpful.There are a variety of financial statements you can look at to analyze your business expenses, but one to consider using is the contribution margin income statement.

What Are Contribution Margin Income Statements?

Traditional income statements show your company’s earnings over a particular period of time. While there are similarities to a traditional income statement, a contribution margin income statement has its own unique characteristics.A contribution margin income statement separates fixed and variable business expenses and shows the revenue generated after those two categories of expenses have been paid.This is useful because you can assess a particular period in your sales cycle to see if you were profitable or if your expenses were unusually high. By separating out fixed and variable expenses, you can see where the bulk of your expenses lie. It’s important to note that the contribution margin income statement cannot be used with Generally Accepted Accounting Principles (GAAP) and is used internally to make financial decisions. It’s not a financial statement you would present to investors or when applying for a loan.

What to Include in Contribution Margin Income Statements

While a traditional balance sheet will look at the cost of goods sold to determine gross profit margins, the contribution income statement looks at different financial components:
  • Fixed expenses
  • Variable expenses
  • Profit/loss

Fixed vs Variable Expenses

Your business has two types of expenses — fixed and variable. Fixed costs are those that are the same each month, like your rent or mortgage. Variable expenses fluctuate and can include your utility bill or inventory orders.By looking at expenses from the fixed or variable perspective rather than only at the cost of goods sold, you can easily see what your net profit (or net loss) is. If you invested in a new piece of machinery for your factory last quarter, for example, you can expect that your variable expenses will be high and that profits will have been lower. But over a normal year, it’s smart to assess how and why those variable expenses fluctuate and adjust your spending accordingly.Recommended: Guide to Variable Costing Income Statements


Profit and loss are the other components in the contribution margin statement. After you deduct those fixed and variable costs from revenues, you’re left with net profit. In the event that you spent more than you generated in a given period, you would have net loss.It may also be helpful to conduct a break even analysis that can provide perspective on how much revenue you need to generate to break even, or come out at zero, against your expenses.Recommended: What Is Net Income?

Traditional vs Contribution Margin Income Statements

There are some differences when it comes to a traditional income statement vs. a contribution,margin income statement to be aware of.
Traditional Income StatementContribution Margin Income Statement
Groups expenses into cost of goods sold, cost of sales, and/or operating/non-operating expensesGroups expenses into fixed and variable expenses
Selling and administrative expenses have their own expense categoryVariable selling and administrative expenses are listed under variable expenses; fixed selling and administrative expenses are listed under fixed expenses
Uses gross marginUses contribution margin

Example of Preparing a Contribution Margin Income Statement

Let’s look at a contribution margin income statement example to understand how one is structured.
-Less variable expenses-125,000
-Less variable selling and administrative expenses  -45,000
      Contribution margin$330,000
-less fixed expenses  -40,000
-less fixed selling and administrative expenses-100,000
    Net profit/loss$190,000
In this example, after paying variable expenses, there is still enough money to pay the fixed expenses. Net profit is $190,000 after both fixed and variable expenses have been paid.

The Takeaway

Using a contribution margin income statement rather than a traditional income statement can help you better understand your business’ ability to pay both fixed and variable expenses in a given period. It’s a useful financial statement to have in your toolkit, as it can help you make smart financial strategy decisions when it comes to running and managing your small business.

Small Business Loan Tips

  1. Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can find recommended small business loans by using Lantern by SoFi.
  2. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
  3. If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.

Frequently Asked Questions

How do you prepare contribution margin income statements?
How is contribution margin calculated from net income?
Why are contribution margin income statements important?
Photo credit: iStock/erdikocak

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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