Business planning: Basic financial terms

The idea

Basic financial terms describe the money figures used when planning and monitoring a business. Revenue is the total income from sales, calculated as price × quantity sold. Costs split into fixed costs, which do not change with output, such as rent, and variable costs, which rise with output, such as raw materials. Total costs are fixed plus variable costs. Profit is revenue minus total costs, and a negative result is a loss. Cash flow records money entering and leaving over time and differs from profit because timing and non-cash items matter. Break-even is the output at which total revenue equals total costs.

For example: Selling 500 units at £10 gives £5,000 revenue; if total costs are £4,000, profit is £1,000.

What earns the marks

• Defines revenue as total income from sales and shows it as price multiplied by quantity sold.
• Distinguishes fixed costs, which do not vary with output, from variable costs, which do, and combines them as total costs.
• Defines profit as revenue minus total costs and recognises a negative result as a loss.
• Explains that cash flow tracks money in and out over time and is not the same as profit.
• Defines break-even as the output where total revenue equals total costs and applies figures to a simple example.

Common mistakes and how to put them right

• Confusing revenue with profit.

  Put it right: Revenue is total sales income, while profit is revenue minus total costs.

• Treating all costs as variable.

  Put it right: Identify fixed costs such as rent separately from variable costs such as materials.

• Assuming cash flow and profit are identical.

  Put it right: Explain that timing of payments and non-cash items can make them differ.

Exam tips

• Show the formula and substitute figures before calculating so method is visible.
• Check whether a question asks for revenue, cost, profit or break-even before starting.
• Use the case study's own figures and units, such as £ or units, throughout the answer.