Costs and revenues
The terms 'revenues' and 'costs' are probably two of the most important concepts in Business and Management. No business can make profit without sales revenues and cost control is vital to a business if it is to maintain and improve profitability.
In simple terms, a business wishing to make a profit must make sufficient revenues to cover its costs because:
For a firm, revenue is the total amount of money received for goods sold or services provided during a certain time period. Revenue is shown usually as the top item in a profit and loss statement from which all charges, costs, and expenses are subtracted to arrive at net profit.
Revenue is also known as sales, sales revenue or turnover. It should be distinguished from other forms of income that a firm generates from other non-operational activities, such as the sale of assets.
Total revenue can be expressed by the following formula:
A firm's performance will be judged by how much profit it is able to make from a given sales revenue. The higher the proportion of profit, the more efficiently the firm is being run, as by implication the costs of the business must have been minimised to increase profit levels.
Fortune magazine produces annual rankings of the largest 500 global corporations, listing sales and profits.
Read the article Fortune's Global 500 ranking (you can do this in the window below or follow the previous link to read the article in a separate window)
Of the top ten businesses in the table, which is the most efficient in terms of turning revenues into profit? In other words, which has the highest profit margin?
In the following sections we will examine the nature of revenues and costs in greater detail.