Costs, Revenue & Profit
Every Business Has Two Number Flows
Two streams of numbers run through every business: money going out (costs) and money coming in (revenue). What’s left after costs have been taken off revenue is profit. If costs are greater than revenue, the business makes a loss.
Understanding the different kinds of cost is the key to nearly every Finance question in the exam. A business that cannot tell which costs are fixed and which are variable cannot set prices, cannot work out break-even, and cannot forecast profit if sales change.
Fixed, Variable and Total Costs
Fixed costs stay the same whether the business makes 10 units or 10,000. Rent, salaries of managers, insurance and business rates are classic examples. A coffee shop pays the same rent whether it sells one latte a day or a thousand.
Variable costs rise and fall with output. Every latte needs coffee beans, milk and a cup — sell twice as many, and those costs double.
Total costs are simply fixed costs plus variable costs for a given level of output:
$$\text{Total costs} = \text{Fixed costs} + \text{Variable costs}$$
Fixed costs stay the same when output changes (rent, salaries, insurance). Variable costs change directly with output (raw materials, packaging, hourly wages). Total costs = fixed + variable.
Revenue
Revenue (sometimes called turnover or sales) is the money coming in from selling products or services. The formula is straightforward:
$$\text{Revenue} = \text{Price per unit} \times \text{Quantity sold}$$
Revenue is not profit. It is the gross figure before any costs are deducted. A business with £1 million in revenue may be making a loss if its costs are £1.2 million.
Worked Example — Oakleaf Coffee
Imagine a fictional UK coffee shop, Oakleaf Coffee. It sells a latte for £3.50. In one week it sells 800 lattes. Its fixed costs (rent, manager’s salary, insurance) are £1,200 per week, and variable costs (beans, milk, cups, hourly staff) are £1.10 per latte.
Step 1 — revenue:
$$\text{Revenue} = \pounds3.50 \times 800 = \pounds2{,}800$$
Step 2 — total variable costs:
$$\text{Variable costs} = \pounds1.10 \times 800 = \pounds880$$
Step 3 — total costs:
$$\text{Total costs} = \pounds1{,}200 + \pounds880 = \pounds2{,}080$$
Step 4 — profit:
$$\text{Profit} = \pounds2{,}800 - \pounds2{,}080 = \pounds720$$
Oakleaf makes £720 profit that week. If sales dropped to 400 lattes, variable costs would fall to £440 but fixed costs stay at £1,200. Revenue would be only £1,400, and the shop would lose £240. This is why understanding the split between fixed and variable costs matters so much — it tells you how sensitive profit is to a change in sales.
High fixed costs, low variable costs — think of a cinema. The building, projector and staff salaries are expensive, but each extra viewer costs almost nothing. Once fixed costs are covered, every extra ticket sold is nearly pure profit. But if attendance drops, the huge fixed costs still have to be paid.
Low fixed costs, high variable costs — think of a market-stall sandwich seller. Stall rent is low, but bread, fillings and packaging cost real money per sandwich. Profit per unit is smaller but the business is far less risky in a quiet week.
The Profit Formula
All profit calculations come from the same simple equation:
$$\text{Profit} = \text{Revenue} - \text{Total costs}$$
If the answer is negative, the business is making a loss for that period. Profit is what the business uses to pay owners, reinvest in growth, or save as retained profit for future years.
The three core formulae: Total costs = Fixed + Variable. Revenue = Price × Quantity sold. Profit = Revenue − Total costs. Every AQA Finance calculation is built from these three.
Setting prices — managers work backwards from the cost per unit. If variable cost per unit is £1.10 and the business wants a contribution of at least £2 to cover fixed costs and make profit, the minimum price is £3.10. Selling below that guarantees a loss on every unit.
Spotting a problem early — if revenue stays flat but total costs creep up month after month, profit is being quietly eaten. A manager watching the numbers can act before a small drift becomes a crisis — switching suppliers, renegotiating rent, or cutting a loss-making product line.
Talking to lenders and investors — a bank deciding whether to lend looks at revenue, costs and profit to judge whether the business can afford repayments. Investors looking at whether to buy shares want to see profit rising year on year. Clean, accurate cost figures are not just internal tools — they are the evidence a business presents to the outside world. A business that cannot explain its own numbers clearly in a meeting with a bank manager is unlikely to walk out with the loan it needs to grow, no matter how good its product is.