💰 Revenue Calculations
Revenue = Price per unit × Number of units sold
Example: A bakery sells 200 cupcakes at £2.50 each. Revenue = £2.50 × 200 = £500
Paper 1 Preparation - Small Businesses » Small Business Financial Calculations
What you'll learn this session
Study time: 30 minutes
- Master key financial calculations for small businesses
- Calculate profit, loss and break-even points accurately
- Understand cash flow forecasting and budgeting
- Analyse financial ratios and performance indicators
- Apply calculations to real business scenarios
- Prepare for Paper 1 financial calculation questions
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Unlock This CourseIntroduction to Small Business Financial Calculations
Financial calculations are the backbone of any successful small business. Whether you're planning to start your own business or analysing existing ones, understanding these calculations is crucial for making informed decisions. In your iGCSE Business exam, you'll need to demonstrate your ability to perform various financial calculations and interpret the results.
Key Definitions:
- Revenue: The total income generated from sales before any costs are deducted.
- Profit: The money left over after all costs have been subtracted from revenue.
- Fixed Costs: Costs that don't change with the level of output (e.g., rent, insurance).
- Variable Costs: Costs that change directly with the level of output (e.g., raw materials).
- Break-even Point: The level of sales where total revenue equals total costs.
Profit and Loss Calculations
Understanding profit is essential for any business owner. There are different types of profit calculations you need to master for your exam.
Types of Profit
Small businesses need to calculate different types of profit to understand their financial performance fully.
📈 Gross Profit
Formula: Revenue - Cost of Sales
Shows profit before operating expenses
📊 Net Profit
Formula: Gross Profit - Operating Expenses
Shows final profit after all costs
📉 Profit Margin
Formula: (Net Profit ÷ Revenue) × 100
Shows profit as a percentage
Case Study Focus: Sarah's Sandwich Shop
Sarah runs a small sandwich shop. Last month, she had revenue of £8,000, cost of sales of £3,200 and operating expenses of £2,800. Her gross profit was £4,800 (£8,000 - £3,200) and her net profit was £2,000 (£4,800 - £2,800). Her profit margin was 25% (£2,000 ÷ £8,000 × 100).
Break-even Analysis
Break-even analysis helps businesses understand the minimum sales needed to cover all costs. This is crucial for planning and decision-making.
Break-even Calculations
The break-even point can be calculated in units or in revenue. Both methods are important for exam success.
⚖ Break-even in Units
Formula: Fixed Costs ÷ (Selling Price per unit - Variable Cost per unit)
The denominator is called the contribution per unit
Example Calculation:
A small pottery business has fixed costs of £1,200 per month. Each pot sells for £15 and costs £8 to make.
Contribution per unit = £15 - £8 = £7
Break-even point = £1,200 ÷ £7 = 171.4 pots (rounded up to 172 pots)
Case Study Focus: Tom's T-shirt Business
Tom prints custom t-shirts from his garage. His monthly fixed costs are £800 (equipment lease, insurance, utilities). Each t-shirt sells for £12 and costs £5 in materials and printing. His contribution per unit is £7, so he needs to sell 115 t-shirts (£800 ÷ £7) to break even each month.
Cash Flow Forecasting
Cash flow is the lifeblood of small businesses. Many profitable businesses fail because they run out of cash. Understanding cash flow calculations is vital.
Cash Flow Components
Cash flow forecasts show when money comes in and goes out of the business. This helps identify potential cash shortages.
💰 Cash Inflows
Money coming into the business from sales, loans, or investments
💲 Cash Outflows
Money leaving the business for expenses, purchases, or loan repayments
💳 Net Cash Flow
Cash Inflows - Cash Outflows for each period
Key Formula: Closing Balance = Opening Balance + Net Cash Flow
Financial Ratios and Performance Indicators
Ratios help compare business performance over time or against competitors. They're essential tools for analysis.
Important Ratios for Small Businesses
These ratios help assess different aspects of business performance and are commonly tested in exams.
🔧 Current Ratio
Formula: Current Assets ÷ Current Liabilities
Measures ability to pay short-term debts. Ideal ratio is around 2:1
🔨 Return on Investment (ROI)
Formula: (Net Profit ÷ Investment) × 100
Shows how much profit is generated from each pound invested
Budgeting and Variance Analysis
Budgets help businesses plan their finances. Variance analysis compares actual results with budgeted figures to identify areas for improvement.
Variance Calculations
Variance analysis helps businesses understand why their actual results differ from their plans.
Key Formulas:
- Variance = Actual - Budget
- Variance % = (Variance ÷ Budget) × 100
A positive variance in revenue is favourable (better than expected), while a positive variance in costs is unfavourable (worse than expected).
Case Study Focus: Emma's Event Planning
Emma budgeted £5,000 revenue for a wedding event but actually earned £5,500. Her revenue variance was +£500 (favourable). She budgeted £3,000 for costs but spent £3,200. Her cost variance was +£200 (unfavourable). Overall, her profit was still £300 better than budgeted.
Exam Tips and Common Mistakes
Success in financial calculations requires practice and attention to detail. Here are key tips for exam success.
Essential Exam Strategies
These strategies will help you tackle financial calculation questions confidently in your Paper 1 exam.
✅ Do's
- Show all working clearly
- Use the correct formula
- Include units (£, %, etc.)
- Round appropriately
- Check your answer makes sense
❌ Don'ts
- Confuse revenue with profit
- Mix up fixed and variable costs
- Forget to show working
- Rush calculations
- Ignore the context
Remember, financial calculations are tools to help businesses make better decisions. Always consider what your calculations tell you about the business's performance and what actions might be needed.