The Lemonade Stand
Imagine you start a lemonade stand. You buy lemons, sugar, and cups. You set up a table. Customers come and pay you for each glass of lemonade.
At the end of the day, you count your money. You made £50 from selling lemonade. But wait—did you really make £50?
Not quite. You spent £20 on lemons, sugar, and cups. So you actually made £30. This simple example shows the three numbers every business owner must understand.
The Three Numbers
1. Revenue (Money In)
Revenue is all the money that comes into your business from sales. If you sell 50 glasses of lemonade at £1 each, your revenue is £50. Revenue is sometimes called "turnover" or "sales."
2. Costs (Money Out)
Costs are all the money you spend to run your business. This includes everything from raw materials to rent to wages. Your lemonade stand costs included lemons, sugar, cups, and maybe the table rental.
3. Profit (What is Left)
Profit is what remains after you subtract costs from revenue. It is the simplest equation in business: Profit = Revenue - Costs. This is the money you actually keep.
Two Kinds of Costs
Not all costs behave the same way. Understanding the difference is important.
- •Fixed costs stay the same no matter how much you sell. Rent for your shop, salaries for permanent staff, insurance—these cost the same whether you sell one item or a thousand.
- •Variable costs change with how much you sell. If you sell more lemonade, you need more lemons and cups. These costs go up and down with your sales.
A small corner shop has high fixed costs (rent, utilities) and lower variable costs. An online seller might have low fixed costs but higher variable costs per order (shipping, packaging).
Why Profit Matters
Profit is not greed. Profit is survival.
A business without profit is like a person who spends more than they earn. It can survive for a while using savings or borrowing, but eventually it will fail.
Profit allows a business to:
- •Pay the owner for their work and risk
- •Save money for difficult times
- •Invest in growth and improvement
- •Hire more people and create jobs
- •Give back to the community
Without profit, none of this is possible. A business that makes no profit is a job, not a business—and often not even a secure job.
A Real Example: The Local Tea Shop
Let us look at a small tea shop for one month:
Revenue:
500 cups of tea × £2 = £1,000
Costs:
Tea and milk: £200 (variable)
Cups and sugar: £50 (variable)
Rent: £300 (fixed)
Electricity: £50 (fixed)
Total costs: £600
Profit:
£1,000 - £600 = £400
The shop keeps £400 after paying all expenses. This is money the owner can take home, save, or invest back into the business.
Ancient Wisdom: Chanakya on Managing Money
Chanakya understood the importance of balancing income and expenditure over 2,000 years ago:
"The king should know the income and expenditure of the treasury. Only by knowing both can he manage the kingdom wisely."
In modern terms: You cannot manage what you do not measure. A business owner must know exactly how much money comes in and goes out. Guessing leads to failure.
"He who spends beyond his means invites ruin."
In modern terms: Costs must never exceed revenue for long. This principle applies to kingdoms, businesses, and families alike. Spend less than you earn—always.
Key Takeaways
- ✓Revenue is all money coming in from sales
- ✓Costs are all money going out to run the business
- ✓Profit = Revenue minus Costs—this is what you actually keep
- ✓Fixed costs stay the same; variable costs change with sales
- ✓Profit is not greed—it is how businesses survive and grow
Reflection Question
Think about a small business you know—perhaps a local shop, restaurant, or service provider. What do you think are their biggest costs? Are most of their costs fixed or variable?
Try to estimate their revenue, costs, and profit. You might be surprised by how thin the margins are in many businesses.