Unit 15

 This section will look at and examine the ways and purpose of estimating the revenue (income), costs and profits of starting up a new business.  The tools and techniques are part of putting together a business plan or planning for the start up of a business.

 Understand how businesses forecast sales volumes and setting prices to estimate revenue.  Understand how to determine fixed and variable costs.  Understand the concept of price and cost and the concept of profit.  Explain how profit is the difference between the total revenue over a period of time and the total costs.  Understand the impact of profits and losses on a business.

 Sales Turnover – the amount of income received from selling goods or services over a period of time.  Sales Volume – the number of items of products or services sold by a period of time  Fixed Costs – costs that do not vary with the output of a product,  Variable costs – costs which change with the number of items made,  Total Costs – the fixed and variable costs added together

 Income – money in to the business, primarily from sales  Expenditure – the costs to run the business, production costs, FC & VC, labour etc, all the money the business has to spend.  Profit – a positive balance, when the revenues are greater than the costs over a period of time.  Loss – a negative balance, when the costs are greater than the revenues over a period of time.

 When starting a business you need to know if you will make any money,  You need to forcast:-  The money you will have to spend and  The money you will have coming in  You also have to know how long you are going to forecast over.

 The income can be calculated by:- Total revenue = Price x quantity *Price of the product x the quantity sold Once you know how much you are going to charge for the product/service then you can work out the total revenue

 There are two costs that need to be taken into account when working out the costs for a business.  Fixed Costs – the costs that stay the same despite how many products you make, like loan repayments, mobile phone contracts etc  Variable Costs – vary directly with the amount of items produced

Fixed CostsVariable Costs

 There can be different costs to estimate and include in the total costs,  To estimate the costs you need to add together the fixed costs and the variable costs Total Costs = Fixed Costs + Variable Costs (FC + VC)

 When a business earns money for a job/service/product the money that is earnt has to be used to cover the costs. There is Tax to pay to the Government as well.  From £100, if the costs are £90 then there will be a PROFIT of £10, if the costs are £110 then there will be a LOSS of £10.  The difference between the revenue and costs is the profit or loss

Profit/Loss = Total revenue – total costs  This will let the business know if it is making a profit and will be able to stay in business or making a loss, and may have to consider closing down.

 What if costs go up?  What if materials go up in price?  What if the cost of insurance goes up?  What if the number of jobs/items sold is lower than expected?  What if the competition was fierce?  What if the economy has a down turn? (again)  What if you sell more than you expect?  What if the cost of materials to make the product went down?

 Are the following making a profit or loss?  Income £900, Costs £800  Income £1100, Costs £1400  Income £45, Costs £73  Income £1.6m, Costs £600,000  Income £127, Costs £97  Income £500,000, Costs £421,000  Income £500, Costs £505

 Which three of the following are examples of variable costs? Select three answers.  ARent on a factory unit  BThe cost of clothes bought by a high street fashion boutique  CAdvertising in a local newspaper  DThe salary of the managing director of a company  ECoca-Cola drinks in a fast food restaurant  FDiesel fuel used by a taxi driver  GThe interest on a loan Answer B,E,F

 Complete the 3 worksheets.  Put together a ‘revision’ sheet to cover ◦ Estimating Income ◦ Estimating Costs, Fixed and Variable ◦ Calculating Profit  Include an explanation of each one and why estimating revenue, costs and calculating profit are important to a ‘start up’ business.

A paintball business charges customers £10 for each paintball session. Last year customers paid for 5,000 sessions. This year, it increased its prices to £11 but the number of sessions sold fell to 4,000. What effect will this have had on revenues? Select one answer.  Revenues will  Aincrease by 10 per cent  Bfall by £  Cchange from £ to £  Dincrease by £1,000

A maker of electric guitars has fixed costs of £2,000 per month. Last month, it manufactured 50 guitars items. Its variable cost was £70 per guitar. This month, it has produced 60 guitars and the variable cost per guitar has stayed the same. What effect will this have on its total costs? Select one answer. Its total cost will increase  Aby 20 per cent  Bby £700  Cfrom £3,500 to £4,200  Dby £70

 Explain what would happen to a business if..  What if costs of rent go up?  What if materials go up in price?  What if the cost of insurance goes up?  What if the number of jobs/items sold is lower than expected?  What if the competition in the market was fierce?  What if the economy has a down turn? (again)

 Estimating revenues, costs and profits homework

Unit 16

 Understand the role of and importance of cash flow to a business  Estimate cash flows  Understand the difference between a cash flow forecast (an estimate) and a cash flow statement (what has already happened)  Explain how cash flow problems arise and how they can be minimised.  Explain how cash flow problems can affect a business  Appreciate how careful planning can minimise risk

 Cash – notes, coins and money in the bank.  Cash flow – the flow of cash into and out of the business.  Cash flow Forecast – prediction of cash in and out of the business in a period of time (future)  Inflow – cash in to a business  Outflow – cash out of a business  Net cash flow – receipts minus the payments.

 Opening Balance – the amount of money in a business at the start of a month.  Closing Balance - the amount of money in a business at the end of a month  Cumulative cash flow – the sum of cash that flows in a business over a period of time  Insolvency – when a business can no longer pay its debts.

 Cash is not just notes and coins. It is also money in the bank. Cash flow is the money coming in to the business and the money being paid out  Cash goes out of the business to pay for things such as bills, insurance, equipment and stock.  Cash comes in to the business from customers. This can be cash payments of paid to the bank

 Cash flow is the flow of money into and out of the business.  There are inflows, cash coming in to the business,  There are outflows, cash going out of the business

InflowsOutflows  Own money,  Loan from the bank,  Cash from sales  Inflow = RECEIPTS  Wages,  Equipment,  Telephone, Gas, electricity, rent and other bills,  Interest on the loan,  Advertising  Outflows - PAYMENTS

 Cash flow is shown in a table,  The NET CASH FLOW is the inflows minus the outflows.

InflowsOutflows

 Businesses can not survive without cash. Imagine what would happen if the business didn’t have enough money to pay its bills – anyone owed money could take you to court to get their money back and the business would have failed  Insolvency is when the business runs out of cash and can not pay.

 It is important that businesses keep up to date with their cash flow, it is vital fop the survival of the business.  CASH FLOW FORECASTS – is a prediction of how cash will flow in to and out of the business. They are also:-  Part of the business plan,  Identify if there is enough cash in the business  To take to the bank if you want a loan

Opening balance, cash at the start of the month. Net cash flow is added to the opening balance for the month, this becomes the Closing balance – which is the starting balance for the next month So, opening balance in Feb is £200

 business/finance/cashflowrev3.shtml business/finance/cashflowrev3.shtml  Work through to the questions about Go Faster Sports  business/finance/cashflowrev2.shtml business/finance/cashflowrev2.shtml  Do the test bite as a test

 Look at the table above can you see any problems with the cash flow?  Closing balance for March is -£300, April is - £900 and May is-£600  What action can be done to avoid this? Next slide

 This cash flow forecast shows problems and the business will struggle in these months.  Actions to avoid this:-  Increase sales revenue,  Reduce costs,  Putting more of her own money in to the business,  Taking out a bigger bank loan.

 Sales can change – in some businesses different seasons or special events can affect the sales.  Costs can change – the price of materials, parts can change, wages can go up. This leads to more money leaving the business.  Credit terms can change – typically a business does not have to pay for things straight away – this is called Trade Credit – a form of loan given to the business. The credit can improve cash flow. Con’t

 Stock levels can change – STOCKS are the materials held by the business. A car manufacturer will hold stocks of steel, paint, car engines or cars, a florist will hold stocks of flowers.  Buying stocks means outflows of cash but selling them means inflows. Increasing stock without increasing sales will make cash flow worse.

How can a business avoid cash flow problems:-  Get the help and support of the bank or investors,  Ensure market research is thorough,  Thoughtful cash flow planning,  Investigate where you can get help to spread payments,  Track the actual cash flow against the forecast.

 See moodle Excel exercises