Business Costs
The Start Up Costs - The costs the business pays out before it can begin trading , they are usually things that only need to brought on one occasion e.g fixtures and fittings.

The Running Costs - The costs that have been paid for a regular basis , to maintain the running of the business e.g rent , wages.

Fixed Costs - Costs that don't alter with production , and output. A business has to pay its fixed costs even if produces nothing. These costs include rents , bills , and broadband.

Variable Costs - Change with output , generally as output increases variable costs will increase. Raw materials are an example of variable costs ; if the business is making more products it will require more raw materials.

FORMULA FOR CALCULATING VARIABLE COSTS = VARIABLE COST PER UNIT X NUMBER MADE/SOLD

Direct Costs - Similar to variable costs , direct costs link directly to the production of the production , and so will change with production. For example , some staff wages and raw materials

Indirect Costs - These costs are independent from production but are necessary for the running of the business. They include management salaries, office rent and telephone bills.

Total Costs - Sum of all a businesses costs. Can be calculated by:

FIXED COSTS + VARIABLE COSTS = TOTAL COSTS.

OR

INDIRECT COSTS + DIRECT COSTS = TOTAL COSTS.7

REVENUE :
All the money a business receives It is vital for a business to receive revenue to cover its costs.
A business can have various means of revenue :

Sales of products
Earning interest on savings
Investing in other businesses
Selling or renting resources
Selling a service e.g gardening
Advice e.g counselling
Advertising space e.g Facebook.

IT IS CALCULATED BY : NUMBER OF SALES (UNITS) X PRICE PER UNIT (£)

EXPENDITURE

Expenditure is the money that a business spends , it can be categorized into groups.

Capital Expenditure : The money spent that will be used by the business for a long time , examples include machinery.
Revenue Expenditure : The money spent on a day-to-day costs e.g staff wages , rent and utility bills

Overheads : The everyday running costs , that aren't directly linked with production but need to be paid even if nothing is produced

PROFIT AND LOSS
- Profit is the money a business has left over after all costs are taken away from revenue.

IT IS CALCULATED BY : REVENUE - EXPENDITURE = PROFIT (a profit is made if a business receives more than it spends)

BREAKING EVEN

Break-even point is when the amount of money spent on making the product is the same as they made selling it.
At this point the business has neither made a profit or loss.

IT IS CALCULATED BY =
Fixed costs

--------------------------------------------------

(Selling price per unit – Variable cost per unit)

The margin of safety : The different between the actual/target sales and break-even point.

A businesses break-even point can be shown on a chart , it is where the lines for total revenue and costs cross.

How costs effect the break-even point :

If fixed costs increase , the break even point will be higher as business must sell more to cover its costs. If the revenue stays they same , the business will make less of a profit. The opposite happens if costs decrease.

If sale prices decrease , the break even point is lower and the business will need to sell fewer units to cover its costs. If costs stay the same , the business will make a larger profit.

Reasoning for increasing sale price : increase profits , if the product has become more expensive to make.

Break-even analysis -

Help set targets , for example it can show a business how many units it needs to sell to break-even , the size of their margin of saftey , the amount of sales needed to avoid a loss.
It can help a business adjust its costs and sales prices , for example if a break-even point is too high , a business could try and lower their break-even point , by changing supplier to reduce costs.
It can help planning , e.g persuade a bank to give them a loan as it can show they will start making a profit soon.

Without a break-even analysis a business will not know how many products it needs to sell , or if pricing is resonable.

Disadvantages :

It assumes all products are sold at the same price , this is not always the case
Doesnt take into account changes in the external business environment
It assumes fixed costs never change - but a business increases they may need to invest in new machinery
Can only apply to a single products
Time consuming.

Budget

A budget is a financial plan created for the future. It is a plan of what the business expects to receive and what it expects to spend.

Why use a budget ?

Keep control of inflows and outflows , make sure that budget holders don't spend more than they think
Enables improved costing , as managers are working towards aims
Motivates staff , might be rewarded if reach targets.
Less likely to overspend
Improves efficiency , businesses can look back and decide if they where accurate or not.

Budgetary Control - When the budgeted figures are checked against the actual ones. The difference is titled "variance"
ADVERSE - SPENDS MORE THAN BUDGETED AMOUNT
FAVORABLE - SPENDS LESS THAN BUDGETED AMOUNT

Disadvantages of a budget :

Predictions of future costs and revenues , so if not accurate it looses its usefulness.
Sticking to budgets may cause staff to make poor decisions - quality over quantity
Staff may need to be trained

Cash Flow Forecasting
Predicts the net cash flow over a period of time , it is a good way of predicting if a business will have enough money to pay off its debts

A business can use a cash flow forecast to :

See if trading performance turns it cash
Analyse whether the business is achieving the financial objects set out in the plan
Identify shortfalls in cash balances
Act as a discipline for planning
Make sure they can afford to pay suppliers and employees

A budget shows expected inflows and outflows over a twelve month period , but a cash flow forecast breaks it down month by month.

Advantages of Cash Flow Forecasts

Predicting problems - identifies a risk of a cash deficit , so a business has enough time to arrange funds
Planning for success - Predicts cash surplus , helps make business more profitable
Decision making - A cash flow forecast can identify whether a new business has raised enough start up capital. They can predict when they will have enough money to buy equipment etc.

Inflows and Outflows
Inflows include all the money coming into the business , examples include sales from products , sales of assets , interest on savings , borrowed money
Outflows are all the money that leaves the business , examples includes payments for stock , wages and bills

Inflows and Outflows can be regular or irregular -

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Revision Notes for the Business assessment

BTEC Business Finance Notes - Unit 2