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Estimating revenues, costs and profits

Estimating revenues, costs and profits. Aims for today. Understand how businesses estimate revenues, costs and profits and why this is important. Recognise the difference between fixed and variable costs. Identify the difference between price and cost.

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Estimating revenues, costs and profits

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  1. Estimating revenues, costs and profits

  2. Aims for today • Understand how businesses estimate revenues, costs and profits and why this is important. • Recognise the difference between fixed and variable costs. • Identify the difference between price and cost. • Identify and use appropriate formulas to forecast profit and losses and appreciate the impact of these on businesses.

  3. Costs and revenue in a business • Create a list of all the costs involved in running a business • What revenue comes into a business?

  4. Revenues • Revenues is the amount of income a business will earn over a period of time like a week or year. • Revenues can also be called sales revenue, turnover or sales turnover To predict total revenues, a business has to predict how many jobs it will do (sales volume) and what the average price charged per job will be.

  5. Total revenue Total revenue = Price x Quantity or TR = P X Q For David this is: £100 (average price) x 15 (jobs) = £1,500 per week Read page 72

  6. Task 1 • Write a definition for the following terms: • Revenues • Sales volume And • Write the formula for calculating Total revenue

  7. Estimating costs • All businesses will have a number of different costs associated with running their business. • Can you think of some examples? • Costs can be separated into FIXED COSTS and VARIABLE COSTS.

  8. 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

  9. Calculate total fixed costs Item Price Repayments on the loan £300 Wages £710 Website and phones £60 Advertising £40 Insurance £90 Total fixed costs xxx

  10. Variable costs VARIABLE COSTS are costs which change directly with the level of production or service provided such as: • Cost of buying raw materials • Fuel costs • Utilities such as gas, electricity and water • Wages for casual staff • Telephone bills • Stock • 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.

  11. Calculate total variable costs Item Price Fuel £110 Wages for casual staff £30 Refreshments £40 Car valeting £20 Total variable costs xxxx

  12. Total Costs Total costs = Fixed costs + Variable costs or TC = FC + VC For David this is: £1,200 + £200 = £1,400 per week Read page 73

  13. Task 2 • Write a definition for the following terms and give 3 examples for each: • Fixed costs • Variable costs • Total costs And • Write the formula for calculating Total costs

  14. Price, cost and profit • The difference between the price paid and the cost is either profit or loss. • For example, if David earns £100 and his costs (wages, tax, bills) are £90 he has made a profit. • If his costs are more than £100, he has made a loss.

  15. Total revenue, total cost and profit • To work out his profit (if any), David must calculate the difference between his total revenue and total costs. Profit/loss = Total revenue – Total Costs For David this would be: £1,500 - £1,400 = £100 profit What happens if his estimates are wrong?

  16. Calculations Calculate the total revenue for the following Number of jobs done Price per job Total revenue 10 £100 10 £200 10 £300 10 £400

  17. Task 3 • Write a definition for the following terms: • Profit • Loss And • Write the formula for calculating whether a profit or loss has been made

  18. Impact of profits and losses • David estimated his business would show a small profit of £100 per week. Over a year this equates to: £100 x 52 = £5,200 But.... • What if the price of petrol, electricity or insurance went up? • What if he had to charge less for his services to compete with other businesses? • Losses are a sign that the business needs to make change or close. • Profits would enable a company to invest more or expand

  19. Task 4 • WORKING BY YOURSELF, complete the David Lutter costs and revenues exercise You have 20 minutes

  20. Quick quiz... • What is revenues or turnover? (3 points) • What is the sales volume (2 points) • Give two examples of a fixed cost? (2 points) • Give three examples of a variable cost? (3 points) • What's the formula for TOTAL REVENUES? (3 points) • What's the formula for TOTAL COSTS? (3 points) • What's the formula for working out PROFIT/LOSS? (3 points) • Is making a profit a sign of success?

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