Calculating Costs, Revenues and Profits

LEARNING OUTCOMES

• By the end of the lesson I will be able to:

– Define Profit, Revenue and Cost

– Calculate Revenue and Costs

– Compare the different types of costs

PROFIT IS...

• Write 1 sentence to describe your understanding of

PROFIT

THE PROFIT FORMULA

PROFIT = TOTAL SALES

less TOTAL COSTS

PROFIT OR LOSS?

SALES COSTS PROFIT or LOSS?

£100,000 £75,000 £25,000 (profit)

£100,000 £125,000 £25,000 (loss)

?

?

WHAT IS THE TREND?

Total sales greater than total costs

= Profit

Total costs greater than total sales

= Loss

?

?

WHAT ARE SALES?

• Various terms used?– Sales– Revenues– Income– Turnover– Takings

• Sales arise through the trading activities of a business

CALCULATING SALES

• The value of sales achieved in a given period is calculated as the quantity of product sold multiplied by the price that customers paid

A formula to remember:

Total sales = Volume Sold x Selling Price

CALCULATING SALES - EXAMPLE

Product Qty Price Sales£ / unit £

T-Shirt 5,000 £10 £50,000

Trousers 2,500 £12 £30,000

Blouse 8,000 £11 £88,000

Shoes 4,000 £10 £40,000

Total 19,500 £208,000

1

2

3

4

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INCREASING SALES• There are two options!

1. Increasing quantity sold– Perhaps by cutting the price– Offering volume-related incentives

2.Achieving a higher selling price– Look to add value rather than simply increase price– Does market research suggest that prices are high

enough or too low?

• Or do both!

COSTS What entrepreneurs need to know.

• What it costs to produce the product or service?

• What the cost of marketing the product is?

• How high are the overheads of the business?

• What the potential costs of a business decision are?

COSTS ARE IMPORTANT BECAUSE THEY...

• Are the thing that drains away the profits made by a business

• Are the difference between making a good and a poor profit margin

• Are the main cause of cash flow problems in a small business

• Change as the output or activity of a business changes – the entrepreneur needs to know how these are likely to change

VARIABLE & FIXED COSTS

• Variable costs– Costs which change as

output varies– Lower risk for a start-up: no

sales = no variable costs• Fixed costs

– Costs which do not change when output varies

– Fixed costs increase the risk of a start-up

EXAMPLES OF VARIABLE COSTS

• Raw materials

• Bought-in stocks

• Wages based on hours worked or amount produced

EXAMPLES OF FIXED COSTS

• Rent & rates

• Wages and salaries

• Marketing

• Insurance, banking & legal fees

SEMI FIXED COSTS• Some costs are fixed in

the short-term, but then change once a certain level of output is reached

• Examples:– Admin staff salaries: stay

fixed until the workload requires that someone else is needed

– Rent: space can be enough for a certain level of output until the point at which the business needs to move to somewhere bigger (or take on more space)

Calculating Costs Revenues and Profits