Costs, Revenue, Profit and Loss

Types of Cost

Every start-up spends money before it makes money. Understanding where that money goes — and whether each cost moves with output or stays fixed — is one of the most practical skills an entrepreneur needs. Costs split into two categories: fixed costs and variable costs.

Fixed costs do not change with output. Even if a business produces nothing this week, it still has to pay them. Fixed costs for a start-up typically include:

• Rent — the cost of business premises, whether a market stall, workshop or small office.
• Insurance — cover for the business, its stock and public liability.
• Advertising — a regular advert in a local newspaper or an annual subscription to a directory listing.
• Salaries — the fixed monthly pay of permanent staff. Salaries are a fixed cost because they do not change based on how much the business produces.
• Utilities — gas, electricity and water bills. Although bills fluctuate slightly, utilities are classified as a fixed cost for this qualification.
• Loan interest — when a business borrows money, the interest charged on that loan is a fixed cost. Note: the loan repayment itself (paying back what was borrowed) is not classified as a business cost — it is a financial outflow, but only the interest element counts as a cost.

Variable Costs

Variable costs rise as output rises and fall as output falls. A baker who makes twice as many loaves uses twice as much flour — that is a variable cost in action. Common variable costs for a start-up include:

• Raw materials — the ingredients, fabric, timber or other inputs used directly in production.
• Packaging — boxes, bags or labels that go with each unit sold.
• Wages — pay calculated by the hour or by the unit, so the business pays more when it produces more and less when production slows.

Total Costs

Once you know the fixed and variable costs separately, you can combine them:
Total costs = Total fixed costs + Total variable costs
This is the full amount a business spends in a given period. Knowing total costs is essential for pricing decisions, for planning whether the business will break even, and for calculating profit or loss.

Revenue

Revenue is the income a business receives from selling its output. The formula is simple:
Revenue = Selling price per unit × Quantity sold

For example, if a small textile business sells tea towels at £8 each and sells 350 in a month, its revenue is £8 × 350 = £2,800. Revenue tells you how much money has come in, but not how much the business has kept — for that, you need to deduct costs.

The formula also works in reverse. If you know the revenue and the quantity sold, you can rearrange to find the selling price:
Selling price = Revenue ÷ Quantity sold

Profit and Loss

Profit is what a business keeps after paying all its costs:
Profit = Revenue − Total costs

If total costs are higher than revenue, the result is a loss — a negative figure. This is common for start-ups in their first months, when costs are high and customers are still building awareness of the business. Identifying a loss early helps the entrepreneur decide whether to adjust prices, cut costs, or both.

Worked Example

Thornwick Brew Co is a sole trader who produces craft lemonade in Sheffield. Each bottle sells at £3.50. In June, she sold 900 bottles. Her monthly fixed costs are £780 (rent £500, insurance £130, loan interest £150). Her variable costs are £1.20 per bottle (ingredients and labels).

Revenue: £3.50 × 900 = £3,150
Total variable costs: £1.20 × 900 = £1,080
Total costs: £780 + £1,080 = £1,860
Profit: £3,150 − £1,860 = £1,290