Profit, contribution and cash answer three different questions. Profit asks whether total income beat total costs, contribution asks what each unit adds, and cash asks whether money is available when a payment is due.
This series extends the chapter on cost and management accounting. It assumes you know the basics from calculating contribution and break-even point.
How does one sale show up three ways?
An invented business sells goods for RM1 000 on credit, and pays RM600 in cash for the goods sold. The customer pays in two months.
- Profit question: the sale is recorded now, so revenue of RM1 000 less the RM600 paid out gives a gross profit of RM400.
- Contribution question: selling price minus variable cost is what matters. If the RM600 is all variable cost, the sale adds RM400.
- Cash question: cash has fallen by RM600 now, and the RM1 000 arrives later.
What are the four lessons?
Read them in this order, because each one fixes a different mix-up.
- Why a profitable business can run short of cash
- Separating contribution from profit using a supplied cost table
- Testing a break-even result against feasible sales capacity
- Building a cash budget without counting a receipt twice
Who should start where?
If a question mentions “cash balance” or “month”, start with lesson 1 or 4. If it gives a table of costs and asks for profit or contribution, go to lesson 2. If it asks whether a target is achievable, go to lesson 3.
When all four feel clear, use the integrated practice set and the cash profit and transaction timing explorer to test yourself.
For a teacher who can point out which word in a question decides the figure, see online one-to-one Accounting tuition.