Business revenues, costs and profit
Revenue (turnover)
Revenue is the total money a business receives from selling its goods or services before any costs are deducted.
Revenue = Price × Quantity sold
Example: A café sells 300 cups of coffee per day at £3.20 each. Revenue = 300 × £3.20 = £960 per day.
Revenue is NOT profit — costs must still be deducted.
Costs
Fixed costs
Costs that do not change with the level of output. They must be paid even if nothing is sold. Examples: rent, business rates, salaries, insurance, loan repayments, depreciation.
UK example: A hairdresser pays £1,200 per month rent regardless of how many clients they see.
Variable costs
Costs that change directly with the level of output or sales. Examples: raw materials, packaging, delivery charges, commission paid to sales staff.
UK example: A baker's flour and egg costs increase as they bake more loaves.
Total costs
Total costs = Fixed costs + Variable costs
Example: Fixed costs = £2,000/month; Variable costs = £4 per unit; 500 units produced. Variable costs = 500 × £4 = £2,000. Total costs = £2,000 + £2,000 = £4,000.
Profit and loss
Profit = Revenue − Total costs (also: Revenue − Total expenditure)
Gross profit = Revenue − Cost of goods sold (COGS)
Net profit = Gross profit − Other operating expenses (overheads like rent, salaries, marketing)
If total costs exceed revenue, the result is a loss (negative profit).
Profit margins (key formulae)
Gross profit margin (GPM)
GPM (%) = (Gross profit ÷ Revenue) × 100
Example: Revenue = £50,000; COGS = £30,000. Gross profit = £20,000. GPM = (20,000 ÷ 50,000) × 100 = 40%.
Interpretation: for every £1 of revenue, the business keeps 40p after paying for the goods it sold.
Net profit margin (NPM)
NPM (%) = (Net profit ÷ Revenue) × 100
Example: Net profit = £8,000; Revenue = £50,000. NPM = (8,000 ÷ 50,000) × 100 = 16%.
Interpretation: for every £1 of revenue, the business keeps 16p after ALL costs.
Interest on borrowing
When a business takes out a loan, it pays interest — a cost of borrowing.
Simple interest formula (for GCSE purposes):
Interest = Principal × Rate × Time (where rate is expressed as a decimal and time in years)
Example: A business borrows £10,000 at 5% per year for 3 years. Annual interest = £10,000 × 0.05 = £500 per year. Total interest = £500 × 3 = £1,500.
This interest is a fixed cost that increases total costs and reduces profit.
Common examiner traps
- Revenue ≠ profit: never state "the business earns £X profit" when only revenue is given.
- Gross profit vs net profit: GPM uses COGS only; NPM deducts ALL expenses (including overheads).
- Percentage margin calculation: always divide by REVENUE, not by costs.
- Fixed costs per unit fall as output rises: a key concept for break-even analysis.
- Profit can fall even if revenue rises: if costs rise faster, profit shrinks.
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