So time to get into the nitty-gritty of sales, revenues and costs! It’s not the most riveting topic – but it’s also not the longest so don’t worry.
Let’s kick things off with sales. Sales are the number of products sold by a business within a certain time period.
Variable costs are directly linked to the output and sales of a business. For example, a furniture shop will have to spend more on raw materials than usual if its product sales have hit higher than normal levels. Wages also count as variable costs as the number of employees in a business often changes.
So far, so good. So how do sales and revenue interact? Simple: selling price x sales = revenue.
The revenue of a business is the income received for selling its products. It is also known as turnover. The revenue of a business is determined by the price of its products.
This means that revenue is determined by multiplying the price of a business’s products by its sales. Therefore, if a brewery sells 1000 bottles of beer a month for £1.50 per bottle, the monthly revenue of the business is £1,500.
Now we can look at how revenue relates to cost!
A business’s profit is the difference between its revenue and its costs. If a business’s costs exceed its revenue, then it will make a loss; if its revenue exceeds its costs, then it will make a profit. Profit can be determined with this simple formula:
Revenue – total costs = profit.
Cost is the amount of money required to start up and then run a business. Businesses will usually have two main forms of cost (variable costs and fixed costs).
Fixed costs are those that stay the same when a business changes its output. This may include the rent a business has to pay on its office space or the fees for a company auditor.
As these costs do not change, they can often pose problems for small businesses as they may have to pay a lot of costs even when they aren’t making much money.
Although fixed costs and variable costs are the main types of cost usually paid by a business, the overall costs can be divided up in an alternative way. These are start-up costs, which may include the costs required to do market research, and running costs, such as employee wages.
Start-up costs may include:
– Costs associated with performing market research to collect relevant data. These may be especially expensive as often market research is done before a business starts selling its products.
– Equipment costs, such as manufacturing machinery, vehicles and office supplies must all be fronted when a business starts up, otherwise it will be unable to function.
– Buildings, or premises are usually important to a business, whether that is office space, shop space or factory space. If a business wants to buy a building, it will have to lay aside a large amount of money or take out a mortgage. It it wants to lease a building, an initial fee will usually have to be paid at the beginning of the lease period.
And that’s it, you made it through sales, revenue and cost – phew!