Calculating costs, revenues and profits

Now we like to mix things up in the Business department and your first taster of this was looking at the 'mathsey' side of the topic quite early on. We realised that one of the fundamental issues when looking at businesses is ensuring we cover our costs and aim to make a profit (whether this goes towards our new boat or a social good is another matter!)

So whatever our purpose or legal status, our main objective is to make a profit. Profit is the surplus of money left once all costs have been covered.

We can calculate profit in the following ways:

Profit = revenue - total costs

OR

Profit = revenue - (fixed + variable) costs

We've mentioned this idea of revenue but what exactly is revenue?

Revenue is the money made from sales (from our customers). There are other ways for a business to receive money but revenue just focuses on the money from sales. You may have heard it being called something else?

Income

Earnings

Takings?

Then we need to consider our costs. Costs have to be paid in order for the business to exist. If we aren't paying for raw materials then we don't have the ability to actually make a product!!!

There are two types of costs:

FIXED => these DO NOT change in relation to the level of production; e.g. rent, salaries

VARIABLE => these DO changes in relation to the level of production; e.g. wages, raw materials

We need to be aware of our finances in order to keep the business functioning. If we aren't making any money, we need to know why and how to resolve the issue. Being on top of our finances can also help us apply for further sources of finance, such as a loan.

Consider this...

What could a business do if it was making a loss?