1.6 Revenue, costs, profits and cash Flashcards
Sales revenue calculation
Price * Quantity sold
Price * Sales volume
Average cost calculation
Total cost / Quantity sold
Sales volume
Number of items sold over a period of time
Sales revenue
The value of sales of a business
Total revenue calculation
Price * Quantity
Profit calculation
Total revenue - total costs
Total cost calculation
Total fixed costs + Total variable costs
Total fixed costs
Do not change with output
rent, loan repayments`
Total variable costs
Do change with output
raw material costs, energy bills, packaging
Average costs calculation
Total costs / output
Average fixed cost calculation
Total fixed costs / output
Average variable cost calculation
Total variable cost / output
Percentage change calculation
((Q2 - Q1) / Q1)*100
Contribution
The difference between the price of a product and its variable costs
Break-even point
Level of output at which the total revenue is exactly the same as the total costs
Neither profit nor loss being made
Break even point calculation
Total fixed costs / (price - average variable cost)
Margin of safety
Difference between actual level of output and break even level of output
Break - even analysis
Looking at break-even point and deciding if business venture will be feasible
Strengths of break-even analysis
Helps to assess strength of business idea and whether it is worthwhile or not
Helps to assess levels of output that need to be reached to make profit
Shows impact of changes in price and/or costs on BEP and any profit levels
Enables calculation of profit/loss over diff levels of output
Helps support application for finance
Weaknesses of break - even analysis
Assumes costs rise steadily - may not: bulk buying can reduce cost per unit
Assumes all output is sold
Only a forecast and estimates of costs and price levels may be unrealistic
Knowing BEP does not mean that you will acc sell that amount
Markets are dynamic so constant changes can affect BEP
Gross profit calculation
Turnover - Variable costs
Gross profit limitation
Does not take into account fixed costs
Operating profit calculations
Turnover - (Fixed+Variable Costs)
Gross profit - fixed costs
Operating profit
Key indicator of business performance
Net profit calculations
Turnover - Total costs - Taxes - Interest
Operating profit - Taxes - Interest
Statement of comprehensive income
Shows a company’s net profit or loss over a given time period
Details all revenues and costs of business
Profit margin
Tells business just what percentage of its turnover is actually profit
Gross profit margin
Shows how efficiently the business is using its main inputs to the production process
Operating profit margin
Highlights the efficiency of the business as a whole
Increasing profit
Adding value
Improving reliability
Repositioning market
Market research
Promotion
Cutting costs
Cash
Money available to the business to cover costs
Crucial to cash flow and working capital management
Cash flow forecast
A statement over time of the cash entering a business from its sales and the cash leaving a business ro payf or its costs
Importance of cash flow forecast
Every business needs available cash on a day to day basis
Cash flow is the flow of money in and out of a business
When a business sells it products, money flows in
When it buys raw materials, money flows out
Cash inflow often lags behind cash outflow
Cash dries up and creditors and bille need to be paid.
Helps to predict when extra finance will be needed to avoid these problems
