1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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) (d) 5000 (e) 8000
1.3.3 Estimating revenues, costs and profits 18