Estimating revenues, costs and profits

AS Business Studies

Mr Pat

Lesson Objectives

Know how a business forecast sales volumes and selling prices to estimate revenue

Understand the difference between fixed and variable costs and be able to identify examples of each.

Understand the difference between price and cost and the concept of profit.

Understand the impact of a profit or loss on a business.

The new businesses

Meet Monsieur LePlonk. He has decided to set up a new business. He will be opening a shop in Sheffield selling French food and wine to the local people.

Meet Shelly Isfit. She has decided to set up a new personal trainer service to help people lose weight in the new year and take advantage of people’s new years resolutions.

Both new businesses need to estimate revenues and will need your help.

Before we start

Is Monsieur LePlonk offering goods or a service.

Give an example of his good or service being offered.

Is Shelly offering goods or a service.Give an example of her good or service

being offered.

What is revenue

Key Term: Revenue is simply another name for the money that a business gets from selling their goods or services

Revenue is also known as sales revenue, turnover, sales turnover or just sales

Key Term: Sales Volume is the number of products or services sold by a company over a period of time.

For example the revenue for January for a sweet shop would be the amount of money they had received from selling sweets in their shop.

How do we work out Sales Revenue

The formula to calculate sales revenue is

Revenue = Price per item sold x quantity of items sold

Or

R = P X Q

So what would be the weekly revenue for a sweet shop that sold 300 bags of sweets at 50p per bag

Answer: £150 – Revenue = 0.5 or 50p X 300

Estimating your revenue

When a business starts they will need to estimate or “guestimate” their revenue for a given period, normally a year.

In pairs discuss for 2 minutes the following How would a business estimate their revenue

e.g. what might they have done previously to help them with an educated guess.

What could be the potential problems to a business of estimating revenue.

How to estimate revenues

A business would use previous experience to estimate revenues

A business may look at its competition to help estimate revenue

A business would estimate how many item they expect to sell per week and the average price per item and can use this to estimate.

What happens if you get it wrong

A danger of estimating may be that you estimate too high or too low.

This may mean that you borrow too much money from banks which will still need to be repaid.

It may mean you order too much or too little stock.

Monsieur Le Plonk – estimating revenue

In your books estimate the daily, weekly and annual (yealy) revenue for Monsiuer LePlonk.

He expects to sell 35 items per day at an average price of £8

Oh La La, thank you for all your help!

Shelly Isfit – estimating revenue

In your books estimate the daily, weekly and annual revenue for Shelly.

She expects to train 5 people per day for an hour each. Her hourly rate for customers will be £30.

Come on people, time to work off those mince pies

and turkey dinner!

Answers – estimating revenue

Check your answers:Monsieur LePlonk:

Days revenue = £8 x 35 items = £280 Weekly revenue = £280 x 5 = £1400 Annual revenue = £70,000

Shelly Isfit: Days revenue = £30 x 5 = £150 Weekly revenue = £150 x 5 = £750 Annual revenue = £37,500

Your thoughts……………

In pairs can you think of 2 ways that a company could

increase it’s revenue?

Increasing revenue

To increase revenue you could increase the price of each item Or Increase the number of items sold.

What will happen to the daily revenue of Monsieur LePlonk if he increases his average price per item to £10

What will happen to the revenue of Shelly Isfit if she trains 6 people per day rather than 5.

Do you think that increasing the price

will always earn more revenue?

If not why not …..

Increasing revenue

Increasing the price of an item does not always increase revenue. This is because by increasing the price you might end up selling less items.

By the same means, lowering the price might mean you do NOT end up losing money as it may mean you sell more items.

What are costs?

Costs are outgoings associated with a business/ There are two main types of costs involved with

running a business. These are Key term - Fixed costs: costs which do not

change when the output of a business increases. (e.g. when more products made)

Key term - Variable costs: costs which change directly with the output of a business (e.g. increase when you make more products and decrease when you make less products)

Task

The following are a list of costs. Put them into the following table to show which are fixed and which are variable costs in your book.

Fixed costs Variable costs

RentElectricity billPetrolLoan repaymentGas billWater bill

Wages of permanent workersInsuranceWages of casual workersAdvertisingStock

Task 2

Identify 3-5 fixed costs and 3-5 variable costs for each of Monsier LePlonk’s and Shelly Isfit’s business.

Write the answers in table in your books

Calculating total costs

Key Term: Total costs are all of the costs for a business.

Total costs = fixed costs + variable costs

Monsieur Le Plonk costs

These are weekly costs for Monsieur LePlonk’s shop.

Calculate his total costs for a week.

Fixed costs Variable costs

Rent (£400) Electricity (£50)

Wages for Mr LePlonk(£250)

Petrol for deliveries (£50)

Loan repayment (£100)

Shelly Isfit costs

These are weekly costs for Shelly Isfit’s shop. Calculate her total costs for a week.

Fixed costs Variable costs

Loan repayment used to buy training equipment(£150)

Petrol to get to clients house or gym (£70)

Wages for Shelly (£300)

Advertising (£50)

What is the difference between price and cost?

Often people think that price and cost are the same thing. In business studies they are not and it is important to understand the difference.

Key term: Price – This is the amount of money you charge a customer to buy your product or service.

Key term: Cost – this is the amount of money a business needs to pay out e.g. for stock, wages, bills etc.

So what is profit and loss?

We have seen that Monsieur LePlonk earns £1400 a year in revenue. From this he will need to pay out his costs such as wages and bills. He will also need to pay tax to the government.

If there is any money left over this is called profit, if his tax and costs are more than the money he has made then this is called a loss

Profit/ loss

Key Term: Profit is when the revenues of a business are greater than its costs.

Key Term: Loss is when the revenues of a business are less than its costs

How to calculate profit/ loss

Profit/Loss = Total Revenue – Total Costs

Task…..

Using the figures from before calculate the weekly and annual profit/ loss for both Monsieur LePlonk and Shelly Isfit.

Which business makes the highest profit?

Remember these are just estimates so the actual figures may be different.

A year on……………….

After a year of trading Monsieur LePlonk has performed better than expected and earned nearly double the profit expected.

What would be the impact on Monsieur LePlonk’s business of making a profit?

A year on……………….

After a year of trading Shelly Isfit has had a tough year and made a loss. Unfortunately she found there has been more competition than expected and the recession has meant people are saving their money.

What would be the impact on Shelly Isfit’s business of making a loss?

Have the Lesson Objectives been met?

Know how a business forecast sales volumes and selling prices to estimate revenue

Understand the difference between fixed and variable costs and be able to identify examples of each.

Understand the difference between price and cost and the concept of profit.

Understand the impact of a profit or loss on a business.