Costs and Revenue Topic 1.3- 13

Money in Business Businesses need money to exist.

Revenue Businesses will receive money by selling their goods or services As such we can say that there are two ways a business can get money Revenue can also be called Sales Revenue Total Revenue

Different sources of revenue A business may have different sources of revenue. For a example a farm;

Different sources of revenue The total amount of money received is calculated using the following formula; For example, if a firm sells 1 sweet for 20p its total revenue will be (1X 20p) 20p If the firm sold 5 sweets for 20p each it would received in total (5 X 20p) £1.00 Unit sold is sometimes called Quantity or Sales Volume. Total Revenue = Selling Price X Number of (TR) Per unit units sold

Forecasting Revenue A new business will not know how much revenue it will receive However, they will need to know how much profit they think they will make To calculate this a business must forecast it’s sales revenue by; Estimating how many units it will sell based on their market research Deciding what prices they will charge for each unit sold.

Costs A new business will have 2 types of costs; Once established a business will only have to pay the running costs.

Running Costs

Total Costs (TC) This is the total amount of money a firm spends on making goods or services It is calculated using the following formula Where; Total Fixed Costs= all fixed costs added together Total variable costs = Variable cost per unit multiplied by the number of units. Total Cost = Total Fixed X Total variable (TC) Costs (FC) costs (VC)

An example of Total Costs A firm makes 10,000 cans of drink It has the following fixed costs £1,000 Rent £5,000 Electricity They also know that it costs 5p to make every can of drink that it produces Calculate Total Costs….

An example of Total Costs A firm makes 10,000 cans of drink It has the following fixed costs £1,000 Rent £5,000 Electricity They also know that it costs 5p to make every can of drink that it produces Calculate Total Costs…. FC (Rent + Electricity)= _______ VC (NUMBER OF CANS x 5p)= ______ TC = FC + VC= ______

An example of Total Costs A firm makes 10,000 cans of drink It has the following fixed costs £1,000 Rent £5,000 Electricity They also know that it costs 5p to make every can of drink that it produces Calculate Total Costs…. FC (£1, 000+ £5,000)= £6,000 VC (10,000 x 5p)= £500 TC = £6,000+500= £6,500

Calculating profit and loss Businesses receive money from selling goods and services They also have to pay costs in order to make the goods or provide the services Profit can be calculated using the following formula; Profit = Sales Revenue – Total Costs

Revenue > Costs= Profit Defining profit and loss If their sales revenue is greater than their costs then they have made a PROFIT If their sales revenue is less than their costs, then they have made a LOSS Revenue > Costs= Profit Revenue < Costs= Profit

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