Financial terms and calculations

• What is a cost in the context of a business?

  A cost is anything that a business has to pay for.
• Why do businesses have costs that need to be paid regularly?

  Because all businesses incur expenses that are necessary for operations.
• What are some examples of costs for a business?

  • Rent
  • Bills
  • Raw materials
  • Staffing costs
  • Petrol
  • Postage
• How are costs categorized in a business?

  Costs are split into three main categories: fixed, variable, and total costs.
• What are fixed costs?

  Fixed costs are costs that do not change regardless of the level of output.
• What is revenue in a business context?

  Revenue is any money that a business makes from selling their products and services.
• Why do businesses need revenue?

  Businesses need revenue to ensure that they can maintain their day-to-day operations and pay their business costs.
• For how long are fixed costs usually fixed?

  Fixed costs are usually fixed for at least a year.
• What are examples of revenue for a florist shop?


  • Selling flowers
  • Charges for delivering to customers
• What are some examples of fixed costs?


  • Rent
  • Insurance
  • Salaries of staff
• What are variable costs?

  Variable costs are costs that change depending on the output of a business.
• What are examples of revenue for a web designer?

  • Fee for designing a website
  • Fee for maintaining or updating a website
• What is the average rate of return (ARR)?

  A calculation that helps a business compare different investment options
• How is revenue calculated?

  Revenue is calculated using the formula: Revenue = selling price × quantity sold.
• How do variable costs behave when a business produces or sells more?

  Variable costs generally rise when production or sales increase.
• Why do businesses need to make investment decisions?

  To decide on purchasing equipment, machinery, or investing in new buildings and vehicles
• If a florist sold 482 bouquets of flowers for £10 each, what is their revenue?

  £4,820
• What is the primary hope of a business when making an investment?

  To see an increase in profits
• What are some examples of variable costs?

  • Petrol
  • Postage
  • Raw materials
  • Wages (staff paid per hour)
• What is the revenue calculation for a web designer who charges £256 to design a website and designs 25 websites in a year?

  £6,400
• How can businesses assess the potential return from an investment decision?

  By comparing it to the return from leaving the money in the bank
• What are total costs in a business?

  Total costs are the sum of fixed and variable costs for the business.
• How do businesses measure their success?

  Many businesses measure their success based on how much of a profit or loss they have made.
• What is the formula for calculating total costs?

  Total costs = fixed costs + variable costs
• If a business can gain 1% interest on its bank account, what should any investment return to be considered worthwhile?


  More than 1% in profit
• What is profit in a business context?

  Profit is any revenue left after all business costs have been paid.
• What is the average rate of return used for?

  It is used to compare the profitability of different choices over the expected life of an investment.
• How does the average rate of return compare the profitability of investments?

  It compares the average annual profit of an investment with the initial cost of the investment.
• Why is it important for a business to compare the return from an investment with bank interest?

  To ensure that the investment is financially better than simply saving the money
• Why is it necessary to compare investments that might last for different periods of time?

  It is necessary to ensure a fair comparison of profitability across investments with varying durations.
• What is the first step a business takes to calculate the average rate of return?

  The business calculates the average annual profit.
• What is the formula for calculating the average rate of return?

  The average rate of return is calculated using the average annual profit divided by the initial cost of the investment.
• What factors should the owner of a building business consider when deciding between a new and used excavator?

  • Reliability of the used excavator
  • Cost difference between new and used
  • Expected lifespan of the used excavator (needs replacement after four years)
  • Impact on job completion speed and overall productivity
• Why might the owner of the building business prefer a new excavator over a used one?

  A new excavator may be more reliable and require less maintenance than a used one.
• How is profit calculated?

  Profit is calculated using the formula: Profit = revenue – total costs.
• What are the potential risks associated with investing in a used excavator for the building business?

  The used excavator may be less reliable and will need to be replaced after four years.
• What factors might influence a business's investment decisions?

  • Potential increase in profits
  • Comparison of returns with bank interest
  • Cost of equipment or machinery
  • Long-term business strategy
• What happens when a business's costs are higher than its revenue?

  This results in a negative profit, which is classified as a loss.
• What is the break-even point?


  The break-even point is where revenue and total costs are the same, resulting in neither profit nor loss.
• If a business has revenue of £50,000 and total costs of £41,000, what is their profit?

  £9,000