1. Topic A.2 Understand how businesses make a profit
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?
120 cones
£20 costs
120 x 75p = £90 sales revenue
Profit = £70
Topic A.2 Understand how businesses make a profit

2. Topic A.2 Understand how businesses make a profit Costs, revenues and profit
By the end of this topic you will be able to:
Understand and identify how businesses make money
Identify sources of revenue for a business
Calculate revenue
Describe how businesses have to spend money
Identify and understand types of expenditure
Understand the importance of knowing revenue and expenditure
Define profit and loss
Calculate profit
"Money" - Liza Minnelli, Joel Grey

3. Revenues
Costs are just one side of the equation - they look at the money going out of the business
Revenues are the other side - they look at the money coming into the business
Businesses generate revenue by selling goods and services

4. Sources of revenue for a business
Some businesses will have just 1 source of revenue e.g. a taxi company provides taxi rides and receives a fare from the customer
Others will have several sources e.g. a night club may charge an entrance fee, sell drinks, hire the venue for private parties mid week
Benjamin takes his girlfriend to see a show in the West End. The tickets cost him £35 each and he is to pay for them when he picks them up at the box office. He has £100 with him when he walks into the theatre and only £2 when he walks out. How can this be?

5. Sources of revenue for a business
In pairs think of a leisure facility near where you live e.g. a bowling alley, swimming pool, cinema
Draw a spider diagram to identify all the possible sources of revenue for your chosen venue

6. Can you justify your answer?
Question time 1 mark
Which one of these is a source of revenue for a newsagent?
Advertising special offers
Sweet sales
Paying delivery boys and girls
Stocking magazines
Can you justify your answer?

7. Revenues Revenue = Number of items sold x the selling price per item
If I sell 100 ice creams at 60p my sales revenue is £_ _

8. Sales revenue = number of sales x price per unit
In the examination you will need to know the formula for sales revenue
Sales revenue = number of sales x price per unit

9. Calculating Revenue 500 1000 1500 7500 Customers Revenue
The amount of money being received from sales. If selling price per meal and drink is £15 then if there are 0 sales the revenue will be _ , if 500 customers then revenue will be £7500
The sales revenue of a restaurant would include starters, main courses, deserts, drinks.* we have assumed here a set menu price of £15
Can you fill in the missing sales revenues in the table below
Customers
500
1000
1500
Revenue
7500
Revenue = 500 sales x £15 = £7500

10. What is the formula for sales revenue?
30 Second Test
End

11. Question time 2 marks
A small business bakes and sells luxury cupcakes. Each cup cakes sells for £1.50
The business sold cupcakes last year
Calculate the total revenue for the business

12. Expenditure Expenditure is anything a business pays out
Businesses have to spend money in order to succeed
What would happen if:
A business has a fantastic new product but nobody knows about it?
A clothes shop has run out of stock of the most popular brand of jeans?
A restaurant opens its doors for business but staff have not turned up because they weren’t paid last week?
An inventor has designed a revolutionary new app but can’t afford to launch it?

13. Expenditure A business will have different types of expenditure:
Marketing
Stock
Staff development
Heat and light
Rent
Repaying loans
Salaries
Product development
Explain how each of these will contribute towards the success of a business of your choice.

14. Expenditure Expenditure is anything a business pays out
If these relate to everyday running costs then they are called overheads e.g. electricity, rent, wages
It is important for a business to know how much money is coming in and going out – WHY?
Business
Money going out is called?
Money coming in is called?

15. Profit
Having considered both sides of the equation – costs and revenues we can now consider the relationship between them.
Total Revenue (TR) – money coming in from sale of goods and services
Total Costs (TC) – money going out to provide for and generate those sales
The relationship between costs and revenue will determine if the business makes a profit or a loss. TC
£1300
There is a shortage
(a loss) of £100 TR
£1000
There is a surplus
(a profit) of £200 TR
£1200 TC
£800
Profit
£200
Loss
£100

16. Revenue and expenditure
Can you complete these sentences
If total revenue is ______ than expenditure the business has made a PROFIT
If total revenue is _____ than expenditure the business has made a ______

17. Profit = revenue - expenditure
In the examination you will need to know the formula for profit
Profit = revenue - expenditure

18. 3 formulae So far you have learnt 3 formulae - can you remember them?
Pens at the ready

19. What is the formula for total costs?
30 Second Test
End

20. What is the formula for sales revenue?
30 Second Test
End

21. What is the formula for profit?
30 Second Test
End

22. Calculating Profit Customers 500 1000 1500 Fixed Costs 12000
Restaurant example
Fixed Cost £12000
Variable Cost £5 per customer
Selling price £15 per customer
Can you calculate the profit or loss for each number of customers?
Customers
500
1000
1500
Fixed Costs
12000
Variable Costs
2500
5000
7500
Total Costs
14500
17000
19500
Total Revenue
15000
22500
Profit / Loss

23. 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 expenses
Calculated by deducting expenses from revenue

24. Financial calculations - Practise
Revenue
Number of products sold x selling price
1000 cups of coffee at £0.80 = £_ _ _
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 variable costs =
Total fixed costs =
Total costs =

25. Financial calculations - Practise
Profit or loss
The difference between revenue and costs
Revenue – costs = Profit (or loss)
1000 cups of coffee revenue = £
1000 cups of coffee costs = £
1000 Cups of coffee profit = £
What would be the outcome if each cup of coffee was sold at just £0.30 and wages were £100 and equipment £60?

26. Financial calculations - Practise
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.

27. Relationship between prices, costs, revenues and profits
Are YOU better than these candidates on “The Apprentice”?
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

28. Understand how businesses make a profit
Kristen runs a small business making balloon decorations for weddings, birthdays 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 ‘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)

29. 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

30. Topic A.2 Understand how businesses make profit
You have now completed this topic, are you able to?
Understand and identify how businesses make money
Identify sources of revenue for a business
Calculate revenue
Describe how businesses have to spend money
Identify and understand types of expenditure
Understand the importance of knowing revenue and expenditure
Define profit and loss
Calculate profit
Try the test yourself quiz number 2