Putting a business idea into practice

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2 Estimating revenues, costs and profits Price Define price. Price is the amount customers pay for goods or a service Explain the difference between price and cost. Each has different meanings in business. Cost is the amount spent by firms making products Selling price is the amount customers are charged when buying a product Estimating revenues What is revenue? Revenue is income earned by a business from sales over a period What determines revenue? The amount of income earned by business from selling depends on two things: the number of items sold and their selling price. State the formula for calculating revenue. Revenue = price x quantity Give an example of estimating revenue. The total revenue raised when 2,000 items priced 30 each are sold = 30 x 2,000 = 60,000. List alternative terms for revenue. Revenue is sometimes called sales, sales revenue, total revenue or turnover. List alternative terms of quantity. Quantity sold, amount sold or sales volume What is a forecast? A forecast is a guesstimate or prediction about the future. Forecasts may or may not turn out to be true. Many firms overestimate sales and underestimate costs How do firms estimate revenue? Forecasting revenue requires the entrepreneur to predict the likely volume of sales over say, the next month and their average price Why is it particularly hard for start-up firms to predict revenue? What is total revenue? Total revenue is the amount of income received from selling products How does price affect revenue? The higher the price charged the greater the revenue earned. Eg if a window cleaners charges 12 and completes 5 jobs in a morning, total revenue = 12 x 5 = 60. If the cleaner can persuade customers to pay 20 and retain all his customers then total revenue = 20 x 5 = 100 How do sales volumes affect revenue? The greater the number of times sold, the higher the revenue earned eg if a window cleaner charges 12 and has 5 customers in a morning, total revenue is 60. If he can clean 8 houses, revenue is 12 x 8 = 72 Estimating costs What are costs? Cost is the amount spent by firms making products. State the main types of cost. There are two main types of cost: fixed cost and variable cost Explain fixed costs. Fixed costs are costs that do not change as output changes. Fixed costs such as rent and interest stay the same even if more is produced. Make a list of common fixed costs. Examples of fixed costs include rent of the business premises, interest payments, loan repayments, administration staff wages, internet and phone bills, insurance payments, and advertising costs. These costs remain the same even if output rises in a period.

8 How are leasing and hire purchase different? Both methods give immediate use of equipment for regular payments. Leased items are not owned by the user. Hired items are only owned after the final payment. Hire payments are higher than leasing for the same item Do grants have to be repaid? Grants do not need to be repaid and no interest is charged Internal & external finance sources What are internal sources of finance? Funds found inside the business eg retained profit What are external sources of finance? Funds found outside the business eg a loan List potential internal sources of finance. A firm can raise finance from within by Retained profits ie using past profits to pay for future growth selling assets (items it owns) that are no longer really needed running down stocks to free up cash List potential external sources of finance. A business can raise funds from Owners: sole traders and partners can invest personal savings. Shareholders can buy more new shares Banks: by securing an overdraft, loan or mortgage Another business willing to offer trade credit, leasing or hire purchase arrangements Government and charities offering grants to help businesses get started or expand How do firms decide on the best type of finance? Entrepreneurs take account of Cost: Some sources are interest free eg shares and trade credit. Others types charge interest eg overdrafts, loans and mortgages Length of time for which finance is required: some finance must be paid back quickly eg trade credit. A loan can be paid back over say 3 years. Share capital need never be repaid

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