Basic Concepts of Revenue and Expenses

Revenue
Revenue is the total money earned by a business from selling goods or services before deducting any costs. It is also called sales or turnover.

Example: If you sell 100 shirts at 1,000 rupees each, your revenue is 100,000 rupees.

Expenses
Expenses are the costs a business pays to operate. These include rent, salaries, electricity, raw materials, and marketing costs.

Profit or Loss
Profit or loss is calculated by subtracting expenses from revenue.

Formula: Profit = Revenue − Expenses

• If revenue is higher than expenses → profit
• If expenses are higher than revenue → loss

Types of Expenses

1. Fixed Expenses
These remain constant regardless of production or sales level.

Examples: rent, salaries

2. Variable Expenses
These change depending on how much is produced or sold.

Examples: raw materials, packaging

Real World Example

Sara runs a clothing brand:

• Revenue: 200,000 rupees
• Expenses:
  • Rent: 30,000
  • Salaries: 50,000
  • Fabric: 60,000
  • Marketing: 10,000
  • Total Expenses = 150,000

Profit = 200,000 − 150,000 = 50,000 rupees

Exam Focus

• Revenue = total money earned
• Expenses = cost of running business
• Profit = Revenue − Expenses
• Fixed expenses do not change
• Variable expenses change with production
• Revenue is not the same as profit

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Overview of Cash Flows

Cash flow refers to the movement of money into and out of a business. Even a profitable business can fail if it does not manage cash properly.

Cash Inflow
Money coming into the business.

Examples:

• Sales revenue
• Loans received
• Owner investments

Cash Outflow
Money going out of the business.

Examples:

• Rent
• Salaries
• Raw materials
• Loan repayments

Types of Cash Flow

1. Positive Cash Flow
More money is coming in than going out. This is healthy for the business.

2. Negative Cash Flow
More money is going out than coming in. This is dangerous and can lead to failure.

Real World Example

A construction company earns high profits on paper, but clients pay after six months. Meanwhile, the company must pay workers and buy materials every month. This creates a cash flow problem even though the business is profitable.

Exam Focus

• Cash flow = movement of money in and out
• Positive cash flow = healthy business
• Negative cash flow = financial risk
• Profit does not always mean good cash flow
• This is a very common exam topic