Investigating Profit

Hi year 10

Learning Objectives

• Identify financial and non-financial objectives of a business

• Explain different methods of measuring business success

• Define and calculate revenue, costs and profits.

What do the following large organisations want to achieve?

Anything that a business wants to achieve e.g.

maximise profit

ESF Pizzeria

• Imagine that you are setting up your own pizza delivery business

What Objectives might you want to achieve in setting up/running this business?

Financial Objectives

Financial Objectives

Financial Objectives – targets expressed in money

terms such as making a profit income or building

wealth

Non-Financial Objectives

Non-Financial Objectives

Measuring Success

Businesses measure their success against their business objectives.

As ESF Pizzeria’s owner one of your financial objectives will be to make profit.

Profit is the main way of measuring the success of Henan Pizzeria but there are other ways it can be measured.

Methods of Measuring Success

Job Security

Employees want to know they are not going to lose their jobs. This helps them plan for the future and motivates them to work hard.

The money flowing into the business is greater than money flowing out. Suppliers and workers will be paid on time.

Positive Cash Flow

Market Share How much of the market a firm has compared to its competitors. It shows the businesses market power and how successful it is compared to its competitors.

Job CreationProviding more employment to people. This creates wealth in the economy and helps raise the standard of living.

Revenue

• Revenue is the amount of money a business will receive from selling a product over a period of time like a day, week or year.

• Revenues can also be called sales revenue, turnover or sales turnover.

To predict total revenues, a business has to predict how much it will sell (sales volume) and what the average price charged per sale will be.

Total Revenue

Total revenue = Price x Quantity or

TR = P X Q

For ESF Pizzeria this is:£14.25 x 20,000 (pizzas) = £285,000 for the year

Costs

• All businesses will have a number of different costs associated with running their business.

• With your partner list possible costs For ESF Pizzeria

There are 2 types of cost

1.The costs that will remain the same – no matter how many pizzas you make

2.Costs that will go up or down depending on the number of pizzas you make

Circle the ones you think will stay the same

• Advertising costs• Administration

costs• Insurance• Pizza Toppings• Rent

• Business rates • Salaries• Flour• Pizza Boxes• Wages for casual

staff

Fixed Costs•FIXED COSTS are costs which do not change with the output produced or the services provided. Such as:

•Rent•Business rates •Advertising costs•Administration costs•Salaries•Insurance

•Fixed costs will remain the same and have to be paid regardless of whether the business is busy or not; and how much it makes and sells.

Variable Costs• VARIABLE COSTS are costs which change directly

with the level of production or service provided such as:

• Flour• Pizza Toppings• Pizza Boxes• Wages for casual staff

• With variable costs, the more that is produced or provided, the higher the variable costs will be. Also, if a business does nothing, the variable costs will be zero.

Total Costs

Total costs = Fixed costs + Variable costsor

TC = FC + VC

For Henan Pizzeria this is:£240,000 per year

Profit• To work out the profit for Vandyke

Pizzeria, you must calculate the difference between total revenue and total costs.

Profit/loss = Total revenue – Total Costs

This would be:£285,000 - £240,000 = £45,000 profit

What happens if costs were £300,000?

Break Even

• We may not sell 20,000 pizzas a year! It could be a lot less!

• Break Even (B.E.P.) = the level of sales a business needs to cover their total costs. At this point total costs = total revenue and neither a profit nor a loss is made.

Learning Objectives

• Identify financial and non-financial objectives of a business

• Explain different methods of measuring business success

• Define and calculate revenue, costs and profits.