1.3.3 Estimating revenues, costs and profits - PowerPoint Presentation

Slide1

1.3.3 Estimating revenues, costs and profits

Sir went to Iceland! On the way to school this morning I called into Iceland I bought 10 boxes of Strawberry and Vanilla ice cream cones and 10 boxes of Choc and Nut ice cream cones Each box cost £1 and has 6 cones in it How many ice creams do I have? How much money did I spend? At break time today I sold the cones at 75p each I was so successful I sold out all my stock How much money did I make from my sales? How much profit did I make? Should I do the same again every day this term?

1.3.3 Estimating revenues, costs and profitsSlide2

1.3.3 Forecasting sales volumes and selling prices to estimate revenue

1.3.3 Estimating revenues, costs and profitsThere are a number of ways to forecast financial data:Researching competitorsChecking selling prices of local competitors Talking to owners of similar ventures to ascertain salesResearching customersQuestionnaires etc. to estimate spending patternsLocal statistics Information is available regarding incomes, age groups, household types etc.Data gathered will be a guesstimate based on a variety of informationSlide3

Financial terms and Simple calculations

In this topic you will learn aboutBasic financial termsCalculating profit and loss1.3.3 Estimating revenues, costs and profitsFor this unit you will need a calculatorIts all about money not mathsIs it true? Does money make the world go round?

How many other songs can you think of with money as a theme?Slide4

Financial Terms

Price- The amount of money paid by a consumer for a good or serviceSales - The number of items sold or services provided Revenue - The value of money coming in from sales (quantity sold x selling price)Sometimes also referred to as sales revenue or sales turnoverCosts - The expenses incurred by a business when providing goods or servicesProfit - The surplus of revenue over costsCalculated by deducting costs from revenue1.3.3 Estimating revenues, costs and profitsSlide5

Financial terms

Fill in the gaps _ _ _ _ _ is one of the 4Ps in the _ _ _ _ _ _ _ _ _ mix. It refers to how much the _ _ _ _ _ _ _ _ pays for a _ _ _ _ or service. _ _ _ _ _ is the amount sold by a business in a given period of time. To calculate _ _ _ _ _ _ _ the business _ _ _ _ _ _ _ _ _ _ sales by price. The higher the price and sales the _ _ _ _ _ _ the revenue. The business must then also calculate its _ _ _ _ _ . These are the _ _ _ _ _ _ _ _ incurred e.g. _ _ _ _ _ for staff, _ _ _ _ _ _ _ _ _ to make goods and _ _ _ _ _ _ _ _ _ to inform customers. Once revenue and costs are calculated the business can work out if it has made a _ _ _ _ _ _ or a loss. A profit is when revenue is _ _ _ _ _ _ _ than costs . A _ _ _ _ is when revenue is _ _ _ _ _ than costs.1.3.3 Estimating revenues, costs and profitsMultipliesLossPrice

Lower

Higher

Costs

Marketing

Profit

Wages

Greater

Promotion

Good

Expenses

Customer

Materials

Revenue

SalesSlide6

1.3.3 Estimating revenues, costs and profits

CostsThe setting up and running of a business is going to incur costsIt is important that an entrepreneur identifies these costs and plans for how to meet them

For some new businesses start-up costs may be very high and the entrepreneur might have to secure finance to cover these

Costs may include premises, raw materials, wages, marketing, utilities, professional advice etc.Slide7

1.3.3 Estimating revenues, costs and profits

Fixed and Variable CostsFixed CostsThose costs that

do not

vary with the amount of business activity i.e. numbers sold or produced

These include

Rent

Salaries

Machinery

Variable Costs

Those costs that

do

vary with the amount of business activity

As more is produced or sold costs will rise

These include

Raw Materials

Wages

Commission on salesSlide8

Calculating

Fixed and Variable Costs1.3.3 Estimating revenues, costs and profitsFixed costs stay the same regardless of output therefore a fixed cost of £12000 is £12000 if you produce 0 items or 1500 items

The fixed costs of a restaurant include rent, tables, chairs, ovens, manager, menus, place settings etc. These costs stay the same regardless of number of customers

Customers

0

500

1000

1500

Fixed Costs

12000

12000

12000

12000Slide9

Calculating

Fixed and Variable Costs1.3.3 Estimating revenues, costs and profits

Variable costs change with the amount of output. If the cost per unit is £5 then if there is 0 output the variable cost will be 0, if 1000 units then variable cost will be £5000

The variable costs of a restaurant would include food ingredients, drinks, number of waiting staff.

Customers

0

500

1000

1500

Variable Costs

(£5 per customer)

0

2500

5000

7500

1000 customers x £5 = £5000Slide10

Calculating

Total Costs1.3.3 Estimating revenues, costs and profitsTotal Cost is calculated by adding together both the Fixed and Variable Costs

An entrepreneur who failed to recognise the importance of both costs would soon experience difficulties

Total Cost = Fixed Cost + Total Variable Cost

Customers

0

500

1000

1500

Fixed Costs

12000

12000

12000

12000

Variable Costs

0

2500

5000

7500

Total Costs

12000

14500

17000

19500Slide11

Financial calculations

RevenueNumber of products sold x selling price1000 cups of coffee at £0.80 = £800CostsAdd up all the costs incurred in making the salesTake care - some costs may be per item sold; others may be per week , month or year£0.15 per cup of coffee, Wages £50, Equipment £25Total costs = (1000 x £0.15) + £50 + £25 = £150 + £50 + £25 = £2251.3.3 Estimating revenues, costs and profitsSlide12

Financial Calculations

Profit or lossThe difference between revenue and costsRevenue – costs = Profit (or loss)1000 cups of coffee revenue = £8001000 cups of coffee costs = £2251000 Cups of coffee profit = £5751.3.3 Estimating revenues, costs and profitsWhat would be the outcome if each cup of coffee was sold at just £0.30 and wages were £100 and equipment £60?Slide13

Financial Calculations

Terry sells luxury bathrobes to boutique retailers across the UK.Each robe sells to retailers at £75 and costs £35 in towelling and other raw materials used to make the product.He sells 600 robes per monthHis monthly costs are:Distribution £2000Wages £4500Marketing £1000Equipment £25001.3.3 Estimating revenues, costs and profitsCalculate Terry’s profit or loss. You must show all your workings.Slide14

Relationship between prices, costs, revenues and profits

What were the costs incurred by the Seaweed Soap team?What happens when costs get out of control?How could the team respond to this error?What is the relationship between costs and price?How might this impact on sales?How might this impact on profit?1.3.3 Estimating revenues, costs and profitsSlide15

Financial terms and calculations

1.3.3 Estimating revenues, costs and profitsKristen runs a small business making balloon decorations for weddings, birthday and corporate events. She sells an average of 100 displays per month at a price of £90. Each balloon display costs £20 to make. She delivers them to venues costing her £1000 per month, pays an assistant a wage of £900 per month and advertises in a local paper for £150 per month. As a sole trader Kristen does not pay herself any money but is hoping to be able to take money out of the business if it makes a profit.Question timeWhat is meant by the term ‘sole trader’? (2 marks)What is meant by the term ‘profit’? (2 marks)

Calculate Kristen’s revenue for one month. (2 marks)

Calculate Kristen’s costs for one month. (3 marks)

Calculate Kristen’s profit or loss for one month. (3 marks)Slide16

The impact of profits and losses on a business and its owners

1.3.3 Estimating revenues, costs and profitsA loss-making business will need to ensure that it has enough cash flow to pay for day to day expensesWithout cash flow there is a likelihood of going out of business as short term debts cannot be paidA profitable business is likely to have met its first objective –of survivalProfits can be reinvested into the business to allow for further expansion or taken out as a reward for the ownerSlide17

30 Second challenge

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In pairs take it in turns to talk finance.

Can you talk about finance for 30 seconds without hesitating or repeating any words?

1.3.3 Estimating revenues, costs and profitsSlide18

MULTIPLE CHOICE

1.3.3 Estimating revenues, costs and profits

January (£)

February (£)

Sales

revenue

8000

(c)

Fixed Costs

5000

(d)

Variable Costs

(a)

3000

Total Costs

9000

(e)

Profit/Loss

(b)

4000

The following table shows the costs, revenues and profit for a business for a two month period.

Fill in the

five

blanks (a)-(e) to complete the table