Revenue, Cost, Profits and Cash 1.3.2-1.3.3

What is revenue?

the total income you make from sales

What is the equation for revenue?

price x quantity

What are fixed costs?

costs that don’t vary in output

What are examples of fixed costs?

• rent

• insurance

• manager wages

• advertising

• loan repayments

• utility bills

What are variable costs?

costs that vary with output so the more you make of the product raises the costs

What are examples of variable costs?

• raw materials

• petrol

• temporary staff wages

• zero hour contract staff

How do you work out total costs?

fixed costs + total variable costs

What is profit?

money made once all costs are paid

Whats the equation for profit?

total revenue - total costs

When are you making a loss?

if your costs are higher than your revenue

What is break-even?

the point where a business just covers their costs so they make neither a profit or loss

What is the equation for break even?

fixed costs / (selling price - variable costs)

answer in units

Break even graph

What is the margin of safety?

the amount of sales the business can lose before they make a financial loss

What is the equation for margin of safety?

actual (planned) output - break even output

What are the limitations of break even?

• assumes costs are static

• assumes you only sell one product

• doesn’t take rising prices in to account (inflation)

Advantages of Break even

• simple model but good starting point

• lower the break even the lower the amount of products needed to sell to make a profit

What is cash?

easily accessible money firms hold in notes, coins and in its bank account

What is cash flow?

the movement of money in & out of a firms bank account

Insolvency

when a business lacks cash to pay its debts

Importance of cash to a business

• pays suppliers

• pays overheads (fixed costs)

• pays employees

• prevents insolvency therefore businesses failure

What is a cash flow forecast?

a report that shows expected movement of cash in and out of business during a period of time (a year)

should be included in a business plan

What is a cash flow statement?

report that shows actual movement of cash in and out of a business during a period of time

opening bank balance

money you have in your bank account at the beginning of the month

cash inflows

income from sales in that month

cash outflow

costs paid out that month

net cash flow

cash inflow – cash outflow

closing bank balance

money left in the bank account at the end of the month

equation for closing bank balance

open bank balance + cash inflow – cash outflow

or

opening bank balance + net cash flow

how to increase cash inflow

• arrange an overdraft

• discount & promote to encourage more revenue

• adapt products to attract customers in

how to reduce cash outflow

• reduce waste and economise

• cut costs

• reduce trade credit

• use cheaper suppliers

• organise trade credit with suppliers

What is an overdraft?

a formal credit agreement with the bank that you can spend more money than you have in your bank account

e.g £1000 overdraft

you pay high interest rates and the agreement will be for 12 months

What is trade credit?

a formal credit agreement with your supplier to delay payment for raw materials for 30 days (14 / 60 / 90 days)

late payment = poor reputation / penalty fee / supplier shops supplying / or a formal credit agreement with your customer that they can delay payment

Why is a strong cash flow important? (3 marks)

• business can pay overheads and running costs

• business has immediate access to pay bills and has enough money left as contingency

• able to prevent insolvency and survive