1.3.3 Estimating revenues, costs and profits Sir went to Iceland! On the way to school this morning I called into Iceland I bought 10 boxes of Strawberry and Vanilla ice cream cones and 10 boxes of Choc and Nut ice cream cones Each box cost £1 and has 6 cones in it How many ice creams do I have? How much money did I spend? At break time today I sold the cones at 75p each I was so successful I sold out all my stock How much money did I make from my sales? How much profit did I make? Should I do the same again every day this term? 1.3.3 Estimating revenues, costs and profits 1.3.3 Estimating revenues, costs and profits

1.3.3 Forecasting sales volumes and selling prices to estimate revenue There are a number of ways to forecast financial data: Researching competitors Checking selling prices of local competitors Talking to owners of similar ventures to ascertain sales Researching customers Questionnaires etc. to estimate spending patterns Local statistics Information is available regarding incomes, age groups, household types etc. Data gathered will be a guesstimate based on a variety of information 1.3.3 Estimating revenues, costs and profits

Financial terms and Simple calculations In this topic you will learn about Basic financial terms Calculating profit and loss Is it true? Does money make the world go round? How many other songs can you think of with money as a theme? "Money" - Liza Minnelli, Joel Grey For this unit you will need a calculator Its all about money not maths 1.3.3 Estimating revenues, costs and profits

Financial Terms Price- The amount of money paid by a consumer for a good or service Sales - The number of items sold or services provided Revenue - The value of money coming in from sales (quantity sold x selling price) Sometimes also referred to as sales revenue or sales turnover Costs - The expenses incurred by a business when providing goods or services Profit - The surplus of revenue over costs Calculated by deducting costs from revenue 1.3.3 Estimating revenues, costs and profits

Financial terms Fill in the gaps Multiplies Loss Price Lower Higher Costs Marketing Profit Wages Greater Promotion Good Expenses Customer Materials Revenue Sales _ _ _ _ _ is one of the 4Ps in the _ _ _ _ _ _ _ _ _ mix. It refers to how much the _ _ _ _ _ _ _ _ pays for a _ _ _ _ or service. _ _ _ _ _ is the amount sold by a business in a given period of time. To calculate _ _ _ _ _ _ _ the business _ _ _ _ _ _ _ _ _ _ sales by price. The higher the price and sales the _ _ _ _ _ _ the revenue. The business must then also calculate its _ _ _ _ _ . These are the _ _ _ _ _ _ _ _ incurred e.g. _ _ _ _ _ for staff, _ _ _ _ _ _ _ _ _ to make goods and _ _ _ _ _ _ _ _ _ to inform customers. Once revenue and costs are calculated the business can work out if it has made a _ _ _ _ _ _ or a loss. A profit is when revenue is _ _ _ _ _ _ _ than costs . A _ _ _ _ is when revenue is _ _ _ _ _ than costs. 1.3.3 Estimating revenues, costs and profits

Costs The setting up and running of a business is going to incur costs It is important that an entrepreneur identifies these costs and plans for how to meet them For some new businesses start-up costs may be very high and the entrepreneur might have to secure finance to cover these Costs may include premises, raw materials, wages, marketing, utilities, professional advice etc. 1.3.3 Estimating revenues, costs and profits

Fixed and Variable Costs Fixed Costs Those costs that do not vary with the amount of business activity i.e. numbers sold or produced These include Rent Salaries Machinery Variable Costs Those costs that do vary with the amount of business activity As more is produced or sold costs will rise These include Raw Materials Wages Commission on sales 1.3.3 Estimating revenues, costs and profits

Calculating Fixed and Variable Costs Fixed costs stay the same regardless of output therefore a fixed cost of £12000 is £12000 if you produce 0 items or 1500 items The fixed costs of a restaurant include rent, tables, chairs, ovens, manager, menus, place settings etc. These costs stay the same regardless of number of customers Customers 500 1000 1500 Fixed Costs 12000 1.3.3 Estimating revenues, costs and profits

Calculating Fixed and Variable Costs Variable costs change with the amount of output. If the cost per unit is £5 then if there is 0 output the variable cost will be 0, if 1000 units then variable cost will be £5000 The variable costs of a restaurant would include food ingredients, drinks, number of waiting staff. Customers 500 1000 1500 Variable Costs (£5 per customer) 2500 5000 7500 1000 customers x £5 = £5000 1.3.3 Estimating revenues, costs and profits

Calculating Total Costs Total Cost is calculated by adding together both the Fixed and Variable Costs An entrepreneur who failed to recognise the importance of both costs would soon experience difficulties Total Cost = Fixed Cost + Total Variable Cost Customers 500 1000 1500 Fixed Costs 12000 Variable Costs 2500 5000 7500 Total Costs 14500 17000 19500 1.3.3 Estimating revenues, costs and profits

Financial calculations Revenue Number of products sold x selling price 1000 cups of coffee at £0.80 = £800 Costs Add up all the costs incurred in making the sales Take care - some costs may be per item sold; others may be per week , month or year £0.15 per cup of coffee, Wages £50, Equipment £25 Total costs = (1000 x £0.15) + £50 + £25 = £150 + £50 + £25 = £225 1.3.3 Estimating revenues, costs and profits

Financial Calculations Profit or loss The difference between revenue and costs Revenue – costs = Profit (or loss) 1000 cups of coffee revenue = £800 1000 cups of coffee costs = £225 1000 Cups of coffee profit = £575 What would be the outcome if each cup of coffee was sold at just £0.30 and wages were £100 and equipment £60? 1.3.3 Estimating revenues, costs and profits

Financial Calculations Terry sells luxury bathrobes to boutique retailers across the UK. Each robe sells to retailers at £75 and costs £35 in towelling and other raw materials used to make the product. He sells 600 robes per month His monthly costs are: Distribution £2000 Wages £4500 Marketing £1000 Equipment £2500 Calculate Terry’s profit or loss. You must show all your workings. 1.3.3 Estimating revenues, costs and profits

Relationship between prices, costs, revenues and profits What were the costs incurred by the Seaweed Soap team? What happens when costs get out of control? How could the team respond to this error? What is the relationship between costs and price? How might this impact on sales? How might this impact on profit? The Apprentice series 5 episode 4 pt3 1.3.3 Estimating revenues, costs and profits

Financial terms and calculations Kristen runs a small business making balloon decorations for weddings, birthday and corporate events. She sells an average of 100 displays per month at a price of £90. Each balloon display costs £20 to make. She delivers them to venues costing her £1000 per month, pays an assistant a wage of £900 per month and advertises in a local paper for £150 per month. As a sole trader Kristen does not pay herself any money but is hoping to be able to take money out of the business if it makes a profit. Question time What is meant by the term ‘sole trader’? (2 marks) What is meant by the term ‘profit’? (2 marks) Calculate Kristen’s revenue for one month. (2 marks) Calculate Kristen’s costs for one month. (3 marks) Calculate Kristen’s profit or loss for one month. (3 marks) 1.3.3 Estimating revenues, costs and profits

The impact of profits and losses on a business and its owners A loss-making business will need to ensure that it has enough cash flow to pay for day to day expenses Without cash flow there is a likelihood of going out of business as short term debts cannot be paid A profitable business is likely to have met its first objective –of survival Profits can be reinvested into the business to allow for further expansion or taken out as a reward for the owner 1.3.3 Estimating revenues, costs and profits

In pairs take it in turns to talk finance. 30 Second challenge In pairs take it in turns to talk finance. Can you talk about finance for 30 seconds without hesitating or repeating any words? 9 10 8 12 13 7 11 6 1 End 2 3 5 4 14 15 26 25 27 28 30 29 24 23 18 17 19 20 22 21 16 1.3.3 Estimating revenues, costs and profits

MULTIPLE CHOICE The following table shows the costs, revenues and profit for a business for a two month period. Fill in the five blanks (a)-(e) to complete the table January (£) February (£) Sales revenue 8000 (c) Fixed Costs 5000 (d) Variable Costs (a) 3000 Total Costs 9000 (e) Profit/Loss (b) 4000 (a) 4000 (b) (1000) (c) 12000 (d) 5000 (e) 8000 1.3.3 Estimating revenues, costs and profits 18