Calculating Costs, Revenues and Profits

LEARNING OUTCOMES By the end of the lesson I will be able to: –Define Profit, Revenue and Cost –Calculate Revenue and Costs –Compare the different types of costs

PROFIT IS... Write 1 sentence to describe your understanding of PROFIT

THE PROFIT FORMULA PROFIT = TOTAL SALES less TOTAL COSTS

PROFIT OR LOSS? SALESCOSTSPROFIT or LOSS? £100,000£75,000£25,000 (profit) £100,000£125,000£25,000 (loss) ? ?

WHAT IS THE TREND? Total sales greater than total costs = Profit Total costs greater than total sales = Loss ? ?

WHAT ARE SALES? Various terms used? –Sales –Revenues –Income –Turnover –Takings Sales arise through the trading activities of a business

CALCULATING SALES The value of sales achieved in a given period is calculated as the quantity of product sold multiplied by the price that customers paid A formula to remember: Total sales = Volume Sold x Selling Price

CALCULATING SALES - EXAMPLE ProductQtyPriceSales £ / unit£ T-Shirt5,000£10£50,000 Trousers2,500£12£30,000 Blouse8,000£11£88,000 Shoes4,000£10£40,000 Total19,500£208,

INCREASING SALES There are two options! 1.Increasing quantity sold –Perhaps by cutting the price –Offering volume-related incentives 2.Achieving a higher selling price –Look to add value rather than simply increase price –Does market research suggest that prices are high enough or too low? Or do both!

COSTS What entrepreneurs need to know. What it costs to produce the product or service? What the cost of marketing the product is? How high are the overheads of the business? What the potential costs of a business decision are?

COSTS ARE IMPORTANT BECAUSE THEY... Are the thing that drains away the profits made by a business Are the difference between making a good and a poor profit margin Are the main cause of cash flow problems in a small business Change as the output or activity of a business changes – the entrepreneur needs to know how these are likely to change

VARIABLE & FIXED COSTS Variable costs –Costs which change as output varies –Lower risk for a start-up: no sales = no variable costs Fixed costs –Costs which do not change when output varies –Fixed costs increase the risk of a start-up

EXAMPLES OF VARIABLE COSTS Raw materials Bought-in stocks Wages based on hours worked or amount produced

EXAMPLES OF FIXED COSTS Rent & rates Wages and salaries Marketing Insurance, banking & legal fees

SEMI FIXED COSTS Some costs are fixed in the short-term, but then change once a certain level of output is reached Examples: –Admin staff salaries: stay fixed until the workload requires that someone else is needed –Rent: space can be enough for a certain level of output until the point at which the business needs to move to somewhere bigger (or take on more space)

Calculating Costs Revenues and Profits