Changes in revenue and costs
An increase in revenue is always a positive thing for a business, because if revenue increases then profits are also likely to increase. Increasing revenue also allows a business to get past its point (BEP) and increase its by selling more products. However, this only applies if costs stay the same or decrease. If costs increase, the increase in revenue may have no impact.
A decrease in revenue is bad for a business. If revenue is decreasing, a business is at risk of not breaking even or having very low margins of safety and levels of profit. The only scenario where a decrease in revenue is not damaging to a business is when costs are also decreasing. If costs are also decreasing, the business may be in the same overall financial position. Sometimes, if revenue decreases, a business may try to reduce its costs, for example by sourcing cheaper materials or employing fewer staff.
Changes in costs
Increasing costs usually have a negative impact on a business. They are likely to increase the BEP or reduce the business’ profit. With increasing costs, a business would have to sell more products in order to break even or make a profit. When costs increase, businesses often have to make the choice of absorbing increased costs or passing them on to customers by increasing prices. As a result, the business will be more likely to make a loss.
Decreasing costs are a positive thing for a business, as long as the quality of its product or service remains the same. Decreased costs are likely to lower the BEP and give a business access to more profit, as it will need to sell fewer products to break even. A business may decide to keep the savings as profit or pass them on to customers as a price decrease. If customers are aware that the business’ costs have decreased (eg if electricity bills are reduced by 50% for everyone in the UK), they may expect a price decrease to be passed on to them.
