1.3.2 Business revenues, costs and profits

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PuttingaBusinessIdeaintoPractice1.3.2Businessrevenues,costsandprofit

Keyelementstothistopic

CostsRevenue Profits

ConceptandCalculation

Whatisrevenue?

Revenueistheincomegainedbyabusinessfromsellinggoodsandservices.Itisa

formofcashinflow.

Howisrevenuegenerated?

Bothnewandestablished businesseswillgeneraterevenuefromtrading,e.g.,sellinggoodsandservices.

Cashinflowsfromnon-tradingsourcesarenotclassedasrevenue,e.g.,loansreceived,saleofassets,ownerscapitalinjectedintothebusiness.

RevenueFormula

Revenue=PricexQuantity

Whatdoesrevenuelooklike?

Totalrevenuerisesindirectproportiontothequantitysold.

At0unitsofsale,totalrevenueis£0.At10unitsofsale,revenueis£40.

Whatisthesellingprice?

TheStart-UpofMuddyBootsFoodCompany

RolandandMirandaBallardgrewtiredofcorporatelifeanddecidedtosetupanewbusiness,makingandsellinghighqualityburgers

1. CalculateMuddyBootsrevenue forMarch.

2. WhatotherinformationdoyouneedtoknowinordertodecidewhetherornottheMuddyBootsbusiness isprofitable?

Example:

MirandaanticipatesthaninMarchtheywillsell400burgerpacks,charging£3.00perpack.

TimetoCalculate

CalculatingRevenue

MarchQuantity sold(units)(Q)Selling priceperunit(SP)REVENUE (QxSP)

400£3

£1200

Whatwouldhappenif?

Miranda’smeatsupplierhasincreasedthepriceofthebeefmincetheyuse.Mirandadecidestoincreasethepriceofherburgerpacksto£3.50.RecalculatetherevenueforMarch

MarchQuantity sold(units)(Q)Selling priceperunit(SP)REVENUE (QxSP)

400£3.50£1400

Extensioncalculation– Calculatethepercentageincreaseinrevenueasaresultoftheincreaseinprice

WhatareCosts?

Thespendingthatoccurstosetupandruna

business

FixedCosts VariableCostsCostswhichchangeasaresultofchangesin

output

Costswhichdonotchangeinrelationto

output

Identify2examplesoffixedcosts

Identify2examplesofvariablecosts

BusinessCosts

FixedCosts VariableCostsExamples:

RawmaterialsOtherboughtinsuppliesWageslinkedtooutput

Examples:Rent&ratesforpremisesWagesandsalariesnot

linkedtooutputMarketingcosts

InsuranceProductdevelopment

costs

BusinessCosts

MuddyBootsCosts

Remember, fixed costs are those costs that stay the same no matter how many burgers the business makes and sells.

Muddy Boots variable costs are spent on items that will need a greater quantity as the number of burgers increases. So as the output increases the amount spend on variable costs increases

Yourchallengeistoidentifytheirfixedandvariablecostsonthenextslide

IdentifytheFixed(F)andVariableCosts(C)

TaketheTrapDoorChallenge

presentsStayawayfromthe

pressspacebartobegin

Somewheredeepintheforestyouhavefoundalogcabin.

Insidethecabinisasetoftrapdoors.Someofthetrapdoorsarefine.However,othersleadtoa

deepdarkdungeon!Stayawayfromthetrapdoor!

WebsitedesignLegal&accountingfees

PieceratepayforpackagingstaffMeat

Roland&Miranda’ssalary

Standfeesatmarkets

Costofbuildingcommercialkitchen

Onions

AdvertisingDevelopment&trademarkingofbrand/logo

Insuranceforproperty/equipm

entVanfordeliveries

WasteproductsattestingstageHerbsPublicliability

insurancePackaging

WhichoftheseisaFIXEDCOSTtoMuddyBootsBurgers?

TotalCostsFormula

TOTALCOSTS=Totalfixedcosts+Totalvariablecosts

TimetoCalculate

Packaging £0.15 perpack

Insurance £50

Advertising £30

Onions £0.10perpack

Meat £0.80 perpack

Herbs £0.05 perpack

MarketStandfees £150

Salary £700

Pieceratepayforpackagingstaff

£1.50perpack

Legal andaccountingfees £50

Miranda identified the following costs for March. She anticipates 400 packs will be sold

Calculate:

1. TotalFixedCosts

2. TotalVariableCosts

3. TotalCosts

TimetoCalculate

Insurance £125Advertising £30Salary £700Legal andaccountingfees £50MarketStandFeesTotal FixedCosts

TotalFixedCosts

£200£1,105

Calculatethevariablecostsperpack

CostPackaging £0.15 perpackOnions £0.10perpackMeat £0.50 perpackHerbs £0.02 perpackPieceratepayforpackaging staff £1.50perpackVariable costperpack £2.27

TotalMuddyBootCosts

MarchVariable costsperunit(VC) £2.27TOTAL VARIABLE COSTS(QxVC) £908FIXED COSTS £1105TOTALCOSTS(FC+VC) £2103

WhatisProfit?

Thedifferencebetweentotalrevenueandtotal

costsTherewardforriskstaken

byentrepreneurs

ProfitFormula

Profit=TotalSales– TotalCosts

Revenue,CostsandProfit

Revenue Total costs Profitorloss?£100,000 £75,000 £25,000=PROFIT£100,000 £100,000 £0=BREAKEVEN£100,000 £125,000 (£25,000)=LOSSIfrevenueisgreaterthantotalcosts=PROFITIf revenueis lessthantotalcosts=LOSSIf revenueisequaltototalcosts=BREAKEVEN

Note:negativefiguresareshowninbrackets

AProfitableMarchforMuddyBoots?

DidMuddyBootsmakeaprofitinMarchusingthenew£3.50price?

Calculatethetotalprofit/loss

Profit/Loss(revenuelesstotalcosts)

£1400(revenue)– 2103(totalcosts)

Profit/Loss=(£703)

SuggestthreewaysMirandacouldimprove

theprofitabilityofMuddyBoots