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.

Costs

Renting an office block is part of a company's fixed 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.

Other costs, called 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.

Fixed costs, variable costs and total 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).

Profit and loss

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.

Losses

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.

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