Financial Terms and Calculations

• Costs


  anything a business has to pay for - including rent, bills and raw materials - split into:

  • fixed costs
  • variable costs
  • total costs
• Costs

  fixed costs - do not change no matter the level of output of the business (usually fixed for atleast a year)

  • rent
  • insurance
  • salaries of staff
• Costs

  variable costs - change depending on output of the business

  • petrol
  • postage
  • raw materials
  • wages (staff paid per hour)
• Costs


  total costs = fixed costs + variable costs
• Financial Calculations


  revenue - money that a business makes from selling their products and services

  • revenue = selling price x quantity sold
• Financial Calculations

  profit = revenue - total costs
• Average rate of return


  a way of comparing the profitability of different choices over the expected life of an investment

  • average annual profit = total profit/number of years
  • average rate of return (%) = average annual profit/cost of investment x 100
• Break-even


  the point at which revenue and total costs are the same - making neither a profit or a loss
• Break-even


  break even level of output informs a business the amount of products needed to be sold in order to reach the break-even point (BEP)
• Break-even


  break even analysis advantages:

  • shows how many products needed to be sold to ensure a profit
  • shows whether a product is worth selling or is too risky
  • shows amount of revenue the business will make at each level of output
  • shows whether costs need to be reduced to lower the BEP
  • can be used to persuade investors or banks to finance a business
  • quick and easy to analyse
• Break-even


  break even analysis disadvantages:

  • assumes a business will sell all of the stock at the same price
  • can be unrealistic
  • variable costs can change regularly, analysis could be inaccurate
  • can be time-consuming to create
• Break-even


  break even graphs display revenue, costs, number of products sold and a break even point
• Break-even


  break even graphs:

  • loss is anything below the break even point, demonstrated between the revenue and total cost lines
  • profit is anything above the break even point, demonstrated between the revenue and total cost lines
  • break even point is the point at which the revenue and total costs lines cross
  • fixed costs line is demonstrated as a straight line across the graph
  • total costs line starts on top of the fixed costs line
• Margin of Safety


  the amount sales can fall before the break-even point is reached and business makes no profit

  • larger the margin of safety = lower risk for business
• Margin of Safety


  margin of safety = actual sales - break-even sales