Year 10 BusinessWednesday 8th January

Mr Nicholls

Objective

To consider how and why a business will need to estimate revenue.

Firstly then…what is revenue?

Revenue is the income earned by a business over a period of time, eg one month. The amount of revenue earned depends on two things - the number of items sold and their selling price. In short, revenue = price x quantity.

For example, the total revenue raised by selling 2,000 items priced £30 each is 2,000 x £30 = £60,000.

Revenue is sometimes called sales, sales revenue, total revenue or turnover

Estimating Revenue

So based on this, a business will need to estimate how much revenue they are going to make through their sales- so they will need to guestimate how much they are going to sell of each thing, and how much money this is going to bring in.

To do this, they’ll need to make sure they fully consider price!

Price

Price will need to be estimated to the best of the businesses abilities – however in some situations this might not be possible. This could be:

Where a business operates in a market where prices change in the short term due to variations in supply and demand.

Competition is direct and fierce (Ryan Air/Easy Jet/Flybe)

The product is brand new and as such, you’re not sure of consumer response (Xbox/PS1 – initial price cuts)

Quantity

Once you’ve estimated price you can then think about how many you are going to sell – or the quantity.

So for example, it might be easy to plan if you’ve been selling the same product for a while and have a loyal customer base OR if you’re a fashionable name or product.

If you’re a brand new product or company it might not be so easy as quite simply, you won’t know about what people will be doing.

This can constantly change as well depending on external factors.

Therefore

Remember – Revenue = Sales x Price

This can be very difficult to predict so most of the time, businesses will be conservative with their ideas and predictions just to make sure they’re not caught out.

Further more…

The business in question will also need to make sure they consider costs – these could be

Variable Costs

Fixed Costs

What do we think these two things mean?

Variable Costs

Costs are the expenses involved in making a product. Firms incur costs by trading.

Some costs, called variable costs, change with the amount produced. For example, the cost of raw materials rises as more output is made.

Raw Materials

Bought in Components

Energy

Piece Rate Labour

Fixed Costs

Fixed costs stay the same even if more is produced. Office rent is an example of a fixed cost which remains the same each month even if output rises.

Salaries

Rent and Council Rates

Marketing

Machinery and Equipment

Costs

Another way of classifying costs is to distinguish between direct costs and indirect costs. Direct costs, such as raw materials, can be linked to a product whereas indirect costs, such as rent, cannot be linked directly to a product.

The total cost is the amount of money spent by a firm on producing a given level of output. Total costs are made up of fixed costs (FC) and variable costs (VC).

Your Turn…

Explain – why is it important that a business makes sure its costs do not exceed its revenue? What might happen if they get it wrong?

Profit…

Put simply, profit is the surplus left from revenue after paying all costs. Profit is found by deducting total costs from revenue. In short: profit = total revenue - total costs.

For example, if a firm has a total revenue of £100,000 and a total cost of £80,000, then they are left with £20,000 profit.

Profit is the reward for risk-taking. A business can use profit to either:

Reward owners.

Invest in growth.

Save for the future, in case there is a downturn in revenue.

Loss…

Trading does not guarantee profit. A loss is made when the revenue from sales is not enough to cover all the costs of production. For example, if a company has a total revenue of £60,000 and a total cost of £90,000, then they have lost £30,000 from trading.

Losses can be reduced or turned into profit by: Cutting costs, eg by letting staff go and

asking those who remain to accept lower wages.

Increasing revenue, eg by cutting prices and selling more items - if demand is elastic.

Now then…

Your turn to answer some questions – you’re going to be given a case study, then you’ll be asked some questions – these need to be answered and handed in at the end of the session please – remember it’s all about demonstrating knowledge and understanding.