1.32 Revenue, Costs and Profit

Revenue

Revenue or income is all the money that comes in to the business. Most businesses earn money by selling items. If a business sells pens for 20p each and manages to sell 10 pens, the revenue is simply £2.00 (all the money received for the pens no matter what the cost was).

Costs

Fixed Costs

Some costs do not change no matter how many products the business makes or sells. For example, the rent of a factory or shop does not change if the shops sells no items or 1,000 items. Permanent employees need to be paid whether or not the business is busy.

Variable Costs

Other costs relate directly to output. For example, if you were running a coffee shop and it was very busy, you would need to buy more coffee, sugar, milk and cakes. Your electricity bill would increase but using the coffee machine so often. You may even have to hire extra temporary staff. However, if the shop was quiet, these costs would be lower.

Total costs

This is simply all the costs added together:

Total Cost = Fixed Costs + Variable Costs

Profit and Loss

Profit is simply the revenue left over after all the costs are paid. Imagine the simple example of selling pens. If you bought a large pack of 20 pens for £1.00 and sold each pen for 20p each, your total revenue would be £4.00 and your total cost would be £1.00. Your profit would be £4.00 – £1.00, which is £3.00.

Profit = Revenue – Total Cost

Sometimes a business may not have enough revenue to cover all the costs. Imagine nobody wanted to buy my pens because they are very poor quality. I may have to sell the pens cheaply to get some money. If I sold the entire box for 75p I would not make a profit. The calculation is still the same, 75p (revenue) – £1.00 (costs) equals -25p. A negative profit is called a loss.

 

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