A level Business Revision - Profit

Summary

This tutorial focuses on the critical concept of profit in A-Level Business. It explains how profit is calculated by subtracting total costs (fixed and variable) from total revenue. The video also discusses the strategic decisions businesses face regarding the use of profits—whether to retain earnings for growth or distribute them as dividends to shareholders. The balance is crucial for business expansion and stakeholder satisfaction, with a cautionary note on potential losses if costs exceed revenue.

Takeaways

• 💼 Profit is a fundamental topic in A-Level Business and is central to understanding business operations.
• 📊 Profit is calculated by subtracting total costs (fixed and variable) from total revenue, which is the sum of sales from all products and services.
• 🏢 Fixed costs remain constant regardless of production levels and include expenses like rent, salaries, and insurance.
• 🔄 Variable costs change with production levels and include costs like raw materials and inventory.
• 💹 Businesses have to balance retaining profits for growth and expansion against distributing profits to owners as dividends.
• 🌱 Retaining profits can be used for internal funding to support business growth without relying on external borrowing.
• 💰 Distributing profits to owners is important as it provides a return on their investment in the business.
• ⚖️ There's a strategic balance that businesses must achieve between retaining earnings for future growth and distributing earnings to shareholders.
• ⚠️ If total costs exceed total revenue, the business incurs a loss rather than making a profit.
• 📝 Students are advised to be prepared for exam questions that may present more complex scenarios, including businesses that make a loss.

Q & A

What is the most fundamental topic in A-level business?

The most fundamental topic in A-level business is profit.

How is profit calculated?

Profit is calculated by subtracting the total costs (fixed and variable) from the total revenue generated from selling goods and services.

What is the difference between fixed costs and variable costs?

Fixed costs remain constant regardless of the scale of production, such as rent and salaries. Variable costs change with the level of output, such as raw materials and inventory.

Can you provide an example of a fixed cost?

An example of a fixed cost is rent, which remains the same regardless of the number of products manufactured or sold.

What is an example of a variable cost?

An example of a variable cost is raw materials, which increase as production increases and decrease if production is reduced.

What is the total revenue?

Total revenue is the sum of money generated from selling a range of goods and services, calculated by multiplying the price of each product by the quantity sold.

What do firms do with their profits?

Firms can either retain profits for growth and expansion or distribute them to the owners, such as paying dividends to shareholders.

Why might a firm choose to retain profits?

A firm might choose to retain profits to fund future expansion without relying on external borrowing, thus potentially increasing next year's profits.

What is the purpose of distributing profits to the owners?

Distributing profits to the owners provides them with a return on their investment and is a common practice at the end of the financial year.

Why is it important for businesses to balance retaining and distributing profits?

Balancing retaining and distributing profits is crucial for businesses to ensure growth and expansion while also satisfying the owners' expectations for returns on their investments.

What happens if a business's total costs outweigh its total revenue?

If a business's total costs outweigh its total revenue, the business has made a loss rather than a profit.

How might a loss affect a business's operations and strategy?

A loss might require a business to reassess its operations, reduce costs, or seek additional funding to avoid bankruptcy and ensure future profitability.

Outlines

00:00

💼 Understanding Profit in Business

This paragraph introduces the fundamental topic of profit in A-Level Business studies. It explains how profit is calculated by subtracting total costs (fixed and variable) from total revenue. Revenue is calculated by multiplying the price of products by the quantity sold. Fixed costs are constant regardless of production levels, including rent and salaries, while variable costs change with production, such as raw materials. The paragraph also discusses the decision businesses face regarding the use of profits: retaining profits for growth and expansion or distributing them to owners as dividends.

05:03

📈 Profit Distribution and Losses

This paragraph continues the discussion on profit by exploring the balance businesses must strike between retaining profits for growth and distributing them to owners as dividends. It highlights the potential risks of retaining too much profit, such as alienating owners, and the risks of distributing too much, such as hindering growth or increasing reliance on borrowing. The paragraph concludes by noting that if total costs exceed total revenue, the business incurs a loss, and that understanding profit calculation is crucial for students preparing for exams.

Keywords

💡Profit

Profit is the financial gain a business makes when its total revenue exceeds its total costs. In the video, profit is described as the most fundamental concept in business. The script explains how profit is calculated by subtracting total costs (fixed and variable) from total revenue, emphasizing its importance to business operations and financial health.

💡Sales Revenue

Sales revenue refers to the total amount of money generated from selling goods and services. The video explains that businesses calculate their sales revenue by multiplying the price of each product by the quantity sold. Sales revenue is crucial because it is the starting point for determining a company's profitability.

💡Fixed Costs

Fixed costs are expenses that remain constant regardless of the level of production or sales. Examples given in the video include rent and salaries of managerial staff. These costs are critical for businesses to manage, as they must be paid even if no products are sold or manufactured.

💡Variable Costs

Variable costs are expenses that fluctuate with the level of production. These include costs like raw materials and inventory, which increase as production increases and decrease when production slows down. The video highlights that variable costs directly impact a business's ability to control total costs.

💡Total Costs

Total costs represent the sum of all fixed and variable costs a business incurs in its operations. In the video, total costs are essential for calculating profit, as they are subtracted from total revenue. Properly managing total costs is vital for maintaining profitability.

💡Total Revenue

Total revenue is the total amount of money a business earns from selling its goods or services. In the video, total revenue is calculated by multiplying the price of products by the quantity sold. It is one of the key figures needed to calculate profit, as total revenue minus total costs determines the profit or loss.

💡Retained Profits

Retained profits are the portion of a company's profit that is kept within the business rather than being distributed to shareholders or owners. The video explains that businesses may retain profits to reinvest in growth or expansion, allowing them to finance development without relying on external borrowing.

💡Dividends

Dividends are payments made to shareholders out of a company's profits. The video mentions that businesses must decide how much of their profits to distribute to shareholders as dividends versus how much to retain for reinvestment. Finding the right balance between these two uses is essential for maintaining shareholder satisfaction and funding future growth.

💡Loss

A loss occurs when a company's total costs exceed its total revenue. The video points out that businesses can also experience losses, not just profits, and that students may encounter exam questions involving calculations where a business makes a loss rather than a profit. Understanding how losses occur is crucial for financial analysis.

💡Expansion

Expansion refers to the growth of a business by increasing its operations, product offerings, or market reach. In the video, expansion is discussed as a reason why businesses might choose to retain some of their profits. Retained profits can be used to fund growth initiatives without relying on external financing, such as loans.

Highlights

Introduction to the fundamental topic of profit in A-Level Business.

How profit is calculated in business.

Explanation of sales revenue and its calculation.

Differentiation between fixed and variable costs.

Definition and examples of fixed costs.

Definition and examples of variable costs.

Calculating total costs by adding fixed and variable costs.

Deriving profit by subtracting total costs from total revenue.

Options for firms regarding the use of their profits.

Retaining profits for business growth and expansion.

Distributing profits to the owners of the organization.

Balancing the decision between retaining and distributing profits.

The potential consequences of retaining too much profit.

The potential consequences of distributing too much profit.

The importance of striking a balance in profit distribution.

The scenario where a business makes a loss instead of a profit.

Encouragement for students to continue their revision and preparation for exams.

Transcripts

[Music]

welcome along to taking the biz you're

an a-level business student this is a

channel of a level business tutorials it

sounds like a marriage made in heaven if

you haven't done it already

think about hitting that subscribe

button in this tutorial we are going to

have a look at possibly the most

important the most fundamental topic in

all of a level business namely profit so

what we're gonna have a look at in this

tutorial is how profit is calculated

which might be a numeric question in

your example we're also gonna have a

look at what firms might use their

profits for so every organization is

going to generate some form of sales

revenue and they will take all of the

different products that they have

available and to calculate their sales

revenue they're going to have a look at

the price of the different products that

they sell as part of their product range

multiplied by the quantity of each

product that they have sold and what

they will then gather is what's known as

their total revenue the total sum of

money they have generated from selling

their range of goods and services now we

know firms do not get to keep all of

that sales revenue because they will

have a wide range of different costs

that they will have to pay in order to

operate and run their organization now

we can split these different costs into

two different categories our fixed costs

are going to be out cost that a gonna

remain constant they're going to remain

a static in the short run regardless of

our scale of production so it doesn't

matter how many products we manufacture

or even if we don't manufacture any at

all our fixed costs are going to remain

at the same level so that might

classically be things like wrench which

will remain at the same rate month after

month

regardless of our

level of output might also include

things like salaries for some of our

clerical staff for our managers might

even include things like insurance these

kind of costs are going to be the same

amount every month regardless of whether

we produce no products at all or whether

we're producing at our maximum capacity

now in order to calculate our cost we've

got to look at a second category as well

which are known as variable costs now

these are costs that are going to change

or alter in relation to our level of

output so as as we increase the scale of

our production some of our costs are

going to rise and if we were to reduce

the scale of our production these costs

would fall so the kind of classic

variable costs that we might have are

typically things like stock or raw

materials if we produce no products at

all we won't require any raw materials

and as we increase the scale of our

production we're going to have to

purchase more and more stock more and

more inventory greater amounts of raw

materials now when we total up all of

our spending on our monthly fixed costs

and our variable costs as well it allows

us to calculate our total costs of

running our organization and then hey

presto we have got everything we need to

be able to calculate the profit of our

organization so when we take our total

revenue the total sum of money we have

generated from running our organization

and from that we subtract the total

costs of running our organization that's

all of our fixed and variable costs

added together it leaves us with our

profit figure now whenever a firm makes

a profit they then have a choice as to

what they are going to do with that

profit and it can be a little bit of a

balancing act

so the first use of profit is to retain

it or to keep it in the organization now

why you might do that is because you

have ambitions of grow

and expanding the business next year and

rather than rely on sources of finance

such as borrowing a decision has been

made to use some of the business's own

profits as an internal method of raising

some funds in order to fund expansion so

you might decide that retaining some of

the profits in the organization might

help to grow the business and

potentially make next year's profits

even more attractive but the alternate

use of profits is to distribute those

profits to the owners of the

organization the reason why people have

invested in this business is to make

some form of return from it so when the

business makes profits at the end of the

financial year it is common for a large

proportion of those profits to be given

out or to distributed to those owners in

limited companies that would be in the

form of a dividend to the shareholders

now you've got a strike a little balance

between how much you're going to retain

versus how much you're going to

distribute to your shareholders if you

retain too much then it may help fund

expansion then it may risk alienating

and angering

the owners of the organization if you

distribute too much it might mean that

the business either does not grow and

improve and expand or has to be too

reliant on borrowing and has to pay that

large sums of interest in order to fund

that expansion so what managers and

owners of businesses are looking to do

is to strike that right balance between

retaining and distributing their profits

quick topic for you how you calculate

profit different types of costs

different uses of profits if they are

made by nothing we should also point out

is that for any organization where those

total costs actually outweigh the total

revenue then that means that that

business has not made a profit in fact

it has made a loss and don't be

surprised if you have calculation

questions on your exam where the

business may

we have made a loss rather than a profit

may just be the examiner asking a

slightly more complex form of profit

calculation question good luck with your

ongoing revision as always keep on

taking the beers and we will see you

next time

you

you

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