What is meant by revenue, costs and profit
Revenue
Example of revenue for a florist shop:
- selling flowers
- delivery charges
Examples of revenue for a web designer:
- fee for designing a website
- fee for maintaining or updating a website
Revenue is worked out using a simple calculation:
Revenue = Selling price × Quantity sold
For example, if a florist sold 482 bouquets of flowers for £10 each, the revenue would be £4,820.
In this case, revenue = £10 × 482 = £4,820
If a web designer charged £256 to design a website and in a year designed 25 websites, their overall revenue would be £6,400.
In this case, revenue = £256 × 25 = £6,400
Costs
A cost is anything that a business has to pay for. All businesses have costs that need to be paid regularly. Examples of costs for a business include rent, bills, and raw materials, staffing costs, petrol and postage.
Costs are split into three main categories: fixed, variable, and total costs.
Fixed costs are costs for a business that do not change, no matter what the level of output for the business. They are usually fixed for at least a year and mean that a business will pay the same amount each week, month or year.
Examples of fixed costs include:
- rent
- insurance
- salaries of staff
Variable costs are costs that change depending on the output of a business. These costs are dependent on how much a business produces or sells. If a business is producing or selling more, variable costs will rise. If a business is producing or selling less, variable costs will fall.
Examples of variable costs include:
- petrol
- postage
- raw materials
- wages (staff paid per hour)
Total costs are the fixed and variable costs for the business added together, giving the total overall costs for the business. The calculation for total costs is:
Total costs = Fixed costs + Variable costs
For example if a business has fixed costs of £18,500 and variable costs of £9,250, their total costs would be £18,500 + £9,250 = £27,750.
Profit and loss
Profit is commonly the main motivator for investment into a business. It is also a vital measure of business and investment success. Many businesses measure their success based on how much of a profit or loss they have made.
Profit is any revenue left over after all the business’ costs have been paid. Where a business’ costs are higher than the revenue they have made, the profit is a negative number, which is classed as a loss. Businesses would never aim to make a loss, and businesses making losses consistently may eventually fail.
Profit is calculated using the following calculation:
Profit = Revenue – Total costs
For example if a business has revenue of £50,000 and total costs of £41,000, they will have an overall profit of £50,000 - £41,000 = £9,000.
If a business has a revenue of £30,000 and total costs of £45,000, they will have an overall profit of £30,000 - £45,000 = -£15,000, or a loss of £15,000.
