A level Business Revision - Profit
Summary
TLDRThis 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 profitsโwhether 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
- ๐ผ Profit is a fundamental topic in A-Level Business and is central to understanding business operations.
- ๐ Profit is calculated by subtracting total costs (fixed and variable) from total revenue, which is the sum of sales from all products and services.
- ๐ข Fixed costs remain constant regardless of production levels and include expenses like rent, salaries, and insurance.
- ๐ Variable costs change with production levels and include costs like raw materials and inventory.
- ๐น Businesses have to balance retaining profits for growth and expansion against distributing profits to owners as dividends.
- ๐ฑ Retaining profits can be used for internal funding to support business growth without relying on external borrowing.
- ๐ฐ Distributing profits to owners is important as it provides a return on their investment in the business.
- โ๏ธ There's a strategic balance that businesses must achieve between retaining earnings for future growth and distributing earnings to shareholders.
- โ ๏ธ If total costs exceed total revenue, the business incurs a loss rather than making a profit.
- ๐ 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
๐ผ 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.
๐ 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.
Mindmap
Keywords
๐กProfit
๐กSales Revenue
๐กFixed Costs
๐กVariable Costs
๐กTotal Costs
๐กTotal Revenue
๐กRetained Profits
๐กDividends
๐กLoss
๐กExpansion
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
you
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