Explain the Importance of Cost, Revenue and Profit for a Business Organisation

Topics: Costs, Variable cost, Revenue Pages: 3 (586 words) Published: April 4, 2013
Unit 3
M1- explain the importance of cost, revenue and profit for a business organisation

1. Cost
Profit is the different between the selling price and the production cost. Product cost include not only the cost of manufacturing a product but also all the other costs incurred in the process of producing or delivering a product or service.

2. Revenue
The revenue of a business is, the income from its operations. It is important for the business to make the gap between costs and revenue as wide as possible as the greather the difference, the greater the level of profit.

Sales revenue= estimated number of products and services sold x average selling price of the products or services

3. Profit is the amount of money that the company has left over, after it' pays off all costs of doing business which includes raw materials, taxes, interest on loans, other routine expenses, remuneration to its staff, etc. Profit is also referred to as "Net income".

The basic formula is:

Profit= Total revenue – total cost

Profit is always used in one or two ways:
* To pay shareholders their dividends
* To invest in the business
Gross profit is the revenue earned by the business minus the cost of making that revenue. Gross profit= Sales revenue – cost of sales
This figure showed how much the products, components, sales, employees and other directly costs compare with the overall sales figures achieved by the business. After the tax is paid the business can spend the reminding money in several ways. If a business is a limited company with shareholders, same of the profit will be paid as dividends or profit can be used to expand the business

D1- Evaluate the importance of cash flow and break even for the effective management of business finance

When you forecast, you are making a statement of what you expect to happen based on same sort of research to support your forecasts. I will describe below two important financial areas.

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