Friday 17th January 2014 Mr Nicholls Year 10 Business Friday 17th January 2014 Mr Nicholls

Objectives To consider how we can calculate profit, and how it can help us make business decisions.

Revenue - Total Costs = Profit What do you think we mean by the term “Profit”? Profit is the difference between revenue and costs – it’s worked out by the formula: Revenue - Total Costs = Profit If costs are more than revenue then you’ll end up with a negative number – this means making a loss.

Profit – why is it important? Firstly – if you’re a business that is new and only just setting out then in all likeliness you might struggle to make profit, simply because you’re likely to have higher levels of expenditure. When you do make profit, these can be either paid out to shareholders as dividends, or can be reinvested back into the company in order to fund ideas or projects. In short – it’s like having a safety net!

Profit Forecasting… In order to forecast profits a business will need to consider its forecast revenue, and its forecast cost – combine the two and then work out its forecast profits – it’s that simple. Why? A business will want to make sure that they are going to be profitable when operating – if they’re running at a loss then it is unlikely that they will survive much past the first few months.

Doom & Gloom VS Optimism When forecasting, you should ensure that your COST estimates allow for unexpectedly high costs (being safe) and that your REVENUE estimates allow for unexpectedly low results – this will give you a low forecast BUT means that you’re more likely to exceed it. Over-optimistic forecasting is not only disappointing, but can cause problems as the management might have planned to use the forecast profit for business expansion etc.

Use of Profits… Normally when a business makes profit they will use it: To invest in extra property or machinery in order to help the business grow. To invest in more efficient systems or technology in order to try to cut costs. To help fund extra stock or supplies. To pay out as dividends to their shareholders as an annual return on their investment. Some businesses will even share their profits with the staff who helped earn them.

And of course…losses… If a business doesn’t make a profit then it will either break even (get back to 0) or end up making a loss – in the case of making a loss, managers could: Try to boost revenues without increasing costs. Act to reduce variable costs per unit. Act to reduce fixed costs where possible. Unfortunately, one of the easiest costs to cut within a business are the staff – they cost quite a lot and realistically, are easy to get rid of!

Work it out… Toni’s ice cream van sells 150 ice creams a day at £1 each. The variable costs are 20p per ice cream and the fixed costs of running the van are £50. 1). What is Toni’s profit per day? (4 marks – show your working). 2). Toni’s daughter wants him to put the price up to £1.20; she thinks sales will stay at 150 ice creams, but Toni is worried that sales will fall to 125. A). By how much will Toni’s profit change if his daughter is correct? (4 marks – show your working). B). What will be the new profit if Toni is right about the price rise to £1.20? (4 marks – show your working). C). Outline why Toni might still want to keep the price at £1. (3 marks)