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hello and welcome to this video on revenue costs and profits now these three terms are really important in business you won't go far in the business world or in a business qualification if you can't understand the difference between these and be able to work out what they mean start by looking at a business now if we think about the finances of a business businesses receive money from customers the money the business receives from customers we call revenue if you picture a business that you visit perhaps a sweet shop something like that all the money the business receives from its customers it would class as revenue now in order to provide those sweets to be able to sell them to you presumably that business has spent money in making them and the money the business spends to produce the products we call costs and the difference between the two there's any money left over we call that profit and that's what we're gonna look at today we're gonna look at these three key terms revenue cost and profits we're gonna look at costs in a bit more detail and then we're gonna be able to do hopefully some calculations now if your mass isn't too hot do not panic these calculations aren't too tough if you follow the formulas and the simple steps you'll be able to master them no problems at all let's start off with revenue what is revenue well revenue is the total money coming into the business from sales and this bit in bold this definition is what I would definitely take down in your notes so revenue is money the business is receiving from selling its products or services to customers people like you and me now sometimes in business this term can be disguised as another term and we shouldn't be caught up by this if you see the words income sales will turn over please do not panic it just means revenue okay so money come into the business is revenue how do we go about calculating revenue well we can calculate work out how much money the business has received by using this for me and I would definitely take this formula down total revenue equals average price times quantity sold and we can use this triangle on the right-hand side to work out revenue but we can also use it to work out price and quantity so let's have a look at an example let's imagine the price of a product is five pounds our sweet shop for example and we sell 400 units while the quantity sold is 400 quantity sold units number produced these all mean the same thing there the number of physical items that have been made so what would be the revenue well revenue is price times quantity how much they charge for each sweet multiplied by the number of sweets that they make so in this situation our revenue would be 2,000 pounds let's have a look at a second example let's imagine this scenario the revenue we know is 60,000 pounds and the price they charge is a hundred pounds per item so we might wonder well how many items or what is the quantity that they've sold to customers again we can use the triangle on the right hand side in this situation we know the revenue is 60,000 and we know the price is a hundred pounds so revenue divided by price will give us quantity so in this example the quantity would be 600 units the third example total revenue is a million pounds and quantity is 250 you might want to pause the video for a second and see if you can work out the price well the price quite simply would be the revenue over here divided by the quantity would give us price so a million pounds divided by 250 give us the price which is 4,000 pounds probably not sweets in this example as that would be pretty expensive for a sweet crunchy okay so that's money coming into the business from sales or revenue and how we work it out now we're going to look at money going out of the business money the business pays which so costs as money the business spends setting up the business or running the business or making the products these are all called costs and again I would take this definition down again unfortunately sometimes business technology can be a bit sneaky and you might see this word here expenditure expenditure is exactly the same as costs again no need to panic there so entrepreneurs people who set up businesses will look at what their costs are and plan on how they might go about meeting them they'll normally look at two different types of costs the two categories of cost which we call fixed and variable let's look at fixed costs first of all now fixed costs are those costs that do not and that's important do not vary with the amount of business activity by that we mean how many items are actually produced so these might be rent or salaries or machinery if we think of about of a business like this one here what might be the cost so this business is paying out even though it's not selling any clothes or any jewelry what if we look at the picture the lighting for example glad I said of cost the business pays but it's not related to how many units they're selling it's something they have to pay even if they don't sell any items so we call those fixed costs if there were staff lurking baps out of shop here and they were being paid a salary then that would also be a cost that would be being paid regardless of how many items are being sold if they don't sell any items you still pay yourself a salary from being there and working and manning the tills so that would be a fixed cost now of course these costs can change the cost of lighting might go up next year salaries might rise next year but in the short term they're not gonna change if you sell one more unit and that's always the question to ask yourself will this cost change if we sell one more unit they fail answer's no it's gonna be a fixed cost variable costs variable costs are different variable costs do vary with the amount of business activity so they do change as you sell or produce more units and this is an important formula that we need to write down variable costs equal the variable cost per unit times the number of units so if we think of an example football manufacturing for example think about what are the costs of the actual football itself the stitching or the plastic involved let's say that's 5 pounds per unit and if we make a hundred footballs that'll be 500 pounds in total and as we make more footballs the costs the amount we spend on plastic and stitching would rise which makes it a variable cost again take down the formula and the definition from this slide pause it if you need to and then we'll move on so we looked at fixed cost we've looked at variable cost unsurprisingly if you add them both together we get the total cost how much the business has spent in total to produce to goods and services remembering we also it into this formula the variable cost is on average how much of the variable cost a per unit multiply by how many units have been made if we look at this diagram it gives us an indication of what our costs might look like so as more units are produced well fixed costs wouldn't change because as we've learnt fixed costs do not vary do not change with the number of units you make but the variable costs would rise as we make more units the amount we spend on variable costs would increase over time the total costs would be both of those numbers added together how much is spent in total the fix plus the variable that's fixed and variable costs now let's have a look at or have a go at categorizing fixed and variable costs let's imagine a scenario for a t-shirt manufacturer what I'd like you to do is pause the video in a minute and decide which of these are fixed costs and which of these are variable costs are there any categories that you think might be a little bit of both okay let's have a look at the answers so which of those costs were lit costs while these were the fixed costs let's look at the first one machinery if you buy a machine to print t-shirts the cost of that machine a thousand pounds say won't change if you produce five t-shirts 10 t-shirts zero t-shirts 100 t-shirts the cost of the machine is the cost of machine it doesn't vary with the number of t-shirts produced interest on a bank loan again if you borrowed money from a bank and you're paying it back that won't change with how many t-shirts you produce the cost will be the same to the business that's another fixed cost salaries if you pay your staff a full-time salary then that won't change with the number of units produced let's see what the variable costs were as well please were the variable cost items raw materials wages and power if you think about it and a t-shirt manufacturing raw materials things like ink and t-shirts the more of those things that the business bought the higher the cost would be so these costs are variable they do change with the level of output right let's have a go at calculating some costs in the table below we've got units of output on the left hand side column fixed costs and a column variable costs and a column for total costs what I'd like you to do is pause the video and see if you could fill in the numbers in the gaps in the table well let's start to have a look at this right if zero units were produced or the effects cost well we know that fixed costs do not change with the amount of units produced even if we produce nothing we still have to spend money on things like rent and heating and bank loans and stuff like that so the fixed cost will be what they are they'll be 18 pounds variable costs do change with how much we produce and in this example if we're not producing anything then our variable costs would be 0 so I'll total costs will be 18 well done if you got that right let's have a look at the second row if one unit is produced again the fixed costs will be 18 the variable costs while producing one item now and the cost per item 8 so our total costs will be 26 pounds for the third row if two units are produced the fixed costs do not vary the variable costs will be two lots of eights excuse the 16 so the total cost will be 34 here's the final complete table you can check that against how you did a couple of minutes ago right so we've looked at revenue we've looked at cost the final thing we've got to look at its profit so money coming into the business is revenue money going out of the business is costs and the smart ones among you will be saying well what do we call the difference what do we call it if there's any money left over what we call it if costs are higher than revenues the answer is profit and loss profit is the difference between the revenue a business and its total costs and this is the formula we use to calculate it again this is an important formula that you should write down in your notes let's have a look at an example if we have a look at an example on the left hand side here we've got total revenue per thousand pounds we've got total costs of 800 pounds so if the business is receiving a thousand pounds and spending 800 pounds he has 200 pounds left over and because it's positive we call that profit woohoo in our other example on the right hand side example 2 this business is receiving more 1200 or 1200 pounds but its costs are a whopping 1,300 pounds so it's costs are higher than its revenues by a hundred pounds this would be a negative number this business has lost has lost a hundred pounds bad news for that business I'm afraid so profit or loss is total revenue minus total cost now this is important for a business if you start up your own business you would be wanting to make a profit it's the return or the reward that you get for getting off your bum and going out there set up a business and taking that risk the higher the profit that you earn the more successful we can say the business has been so there we go that's what we've looked at today revenue cost and profits three different types of cost fixed variable and total and fingers crossed we should now be able to have a go at calculating revenue costs and determining whether a business has made a profit or loss that's it that's the end