Business Unit One

Costs

• Total Costs = Fixed Costs + Variable Costs
• Fixed Costs: costs that don't change with output. for example, the amount that a firm produces and sells doesn't change the fact that they still have to pay rent
• Variable Costs: costs that are directly affected by output. for example, raw materials are variable costs because how much the firm spends on them depends on how much the firm produces

Total Revenue

• Total Revenue = Price X Quantity Sold
• Price can be raised or lowered to change the total revenue
• Quantity sold can be influenced by amending the elements of the marketing mix

Profit

• Profit = Total Revenue - Total Costs
• Profit relates to the costs incurred by a firm and the revenue that the firm gains

Contribution

• Contribution = Selling Price per Unit - Variable Costs per Unit
• Contribution is the amount made per unit produced which, when sold, the money made goes towards paying off fixed costs
• Total Contribution = Contribution per Unit X Quantity of Units Sold
• Total contribution is the amount made from multiple sales which contribute towards fixed costs or overheads

Break Even

• Break Even = Fixed Costs / Contribution per Unit
• The break even point occurs where total revenue equals total costs
• The formula gives you the amount of units which need to be sold in order for the firm to break even
• The break even point depends on the number of sales needed to generate revenue to cover costs

Cash Flow

• Cash Flow refers to the money coming into a business from selling its products and the money it spends on all the aspects of production
• Money coming into the business from sales is used to help pay for money going out of the business to help pay for production
• If the business is receiving less in cash inflows compared to what it has to pay out in debts then it will start to face cash flow problems

Cash Flow Forecast

• predicts the net cash flows of a business over a future period
• estimates what cash inflows into the business and outflows out of the business
• the result of a forecast is the estimate of cash left at the end of each period covered (usually a month)
• they help a business identify potential shortfalls in cash balances
• they help a business analyse whether they are acheiving financial objectives
• Net Cash Flow = Total Income - Total Outgoings

Budget

• an agreed plan that estimates the income and expenditure of a business or a part of a business over a period of time
• used extensively in planning
• helps monitor cash flow and identify departures from plans

Income Budget

• shows the agreed, planned income of a business over a period of time

Expenditure Budget

• shows the agreed, planned expenditure of a business over a period of time

Profit Budget

• show the agreed, planned profit of a business over a period of time

Benefits of Using Budgets

• to establish priorities by indicating the level of importance attatched to a division in the business
• to provide direction and coordination by ensuring that spending is put towards the firms main aims
• to assign responsibility by identifying the person who is directly responsible for any success or failure
• to motivate staff by giving them greater responsibility and recognition when targets are met
• to improve efficiency by investigating reason for failure and success
• to encourage foward planning by studying possible outcomes

Drawbacks

• incorrect allocations, a budget that is too generous may encourage inefficiency
• external factors may not be considered or may change and affect the plan
• poor communication, budgets must be agreed between people who understand the area in question