FULL Period 1 6.2 Understanding Simple Financial Terms A2
Understanding Simple Financial Terms
Discussion: What are some things you spend money on every month? How do you keep track of your expenses? Do you use an app, write it down, or just remember? Is it important for a company to track its spending and earnings? Why? Have you ever sold something (e.g., a car, clothes, etc.)? Did you make a profit? What happens if you spend more money than you make? How does this apply to businesses?
Understanding Simple Financial Terms
In business, companies need to understand how they make and spend money. We will learn some important financial terms that help companies understand if they are doing well or not.
1. Revenue (Income)
Revenue is the total amount of money a company receives from selling its products or services. It is also called income.
- Example:
If a company sells 100 t-shirts for $10 each, the company’s revenue is $1,000.- Revenue = 100 t-shirts x $10 = $1,000
Tip: Revenue is all the money that comes into the company.
2. Expenses (Costs)
Expenses are the costs a company pays to run the business. This can include things like salaries (paying workers), rent (paying for the building), and materials (buying things to make products).
- Example:
A company spends $600 to pay for the workers, rent, and other costs.- Expenses = $600
Tip: Expenses are all the money that goes out of the company.
3. Profit
Profit is the money that is left after a company subtracts all its expenses from its revenue. If the company has money left, it is making a profit.
- Example:
A company has revenue of $1,000 and expenses of $600.
Profit = Revenue – Expenses
Profit = $1,000 – $600 = $400
Tip: Profit is the extra money a company keeps after paying its costs.
4. Loss
Loss happens when a company’s expenses are more than its revenue. In this case, the company is losing money.
- Example:
If the company’s revenue is $500 and its expenses are $600, the company has a loss.- Loss = Revenue – Expenses
- Loss = $500 – $600 = -$100
Tip: A loss means the company spent more money than it made.
Summary
- Revenue is all the money a company makes from sales.
- Expenses are the costs of running the business.
- Profit is when the company has more revenue than expenses.
- Loss is when the company has more expenses than revenue.
Discussion Questions Activity
Instructions:
In pairs or small groups, discuss the following questions. Use the vocabulary you’ve learned in your answers (e.g., revenue, expenses, profit, loss, cash flow, assets, liabilities, etc.). Be prepared to share your ideas with the class.
Discussion Questions:
- Revenue and Expenses:
- “What can a company do if its expenses are higher than its revenue?”
- “Can you think of ways a company can reduce its expenses? Give examples.”
- Profit and Loss:
- “Why is making a profit important for a business? How does it help the company grow?”
- “What are the risks if a company has a loss for many months in a row?”
- Cash Flow:
- “Why is it important for a business to have good cash flow? What happens if cash flow is low?”
- “How can a company improve its cash flow?”
- Assets and Liabilities:
- “What is the difference between assets and liabilities? Can you give examples of each?”
- “Why is it important for a company to manage its liabilities carefully?”
- Break-even Point:
- “What does it mean when a company reaches its break-even point? Why is this important?”
- “What can a company do to go from break-even to making a profit?”
- Investments:
- “What are some smart investments a company could make to grow its business?”
- “Why might a company invest in new technology or equipment?”
- Capital and Funding:
- “If you were starting a business, how would you raise capital (money) to fund it?”
- “Why is capital important for both new and existing companies?”
- Dividends and Shareholders:
- “What are dividends, and why might a company decide to give them to shareholders?”
- “Do you think companies should always give dividends? Why or why not?”
- Debt and Liabilities:
- “Is it a good idea for companies to take on debt? Why or why not?”
- “What can happen to a company if its liabilities become too large?”
- Future Planning:
- “How can a company plan for future growth? What should it focus on financially?”
- “What are some financial goals a company might have for the next five years?”