As a Business student you probably hear your teacher talking about external factors, as well as business finance? Hopefully you share the same passion and interest in these topics, as they are so closely linked. If you actually think about what is happening in the wider world that we live in, you will be able to apply your business knowledge and make the connections.

One of the real factors that got me thinking was the way that the price of oil has decreased over the last few years. The price of oil has a massive impact on the level of disposable income that consumers have, mainly because this effects how much it costs us to fill up our cars. As petrol / diesel is seen as an in-elastic product (see my PED video if unsure on this term), when the price increases the cost of living (inflation) starts to increase. This is seen as a bad thing for an economy as consumers tend to save and not spend, when they lose confidence.

Below shows you how the price of petrol has massively reduced over the last few years;

 December 2015: £1.01 per L 
 April 2012: £1.42 per L

Let's look at how this data could impact on a business. Imagine that Bee works as a self-employed parcel delivery driver and is a sole trader. As a result Bee rents his own van from a leasing company and pays his insurance in a lump sum at the start of every year. Bee gets paid on average £0.50 for each parcel he delivers and on average Bee delivers 600 parcels each week. He has to fill his van up with petrol and typically will use 40L each week.

Bee has produced a budget to estimate how much profit / loss he would make based on the current Petrol prices of £1.01 per L.

Variable Costs : £1.01 per L x 40L = £40.40 per week x 52 = £2100.80 each year

Fixed Costs : £299 van rental per month x 12 months = £3588 each year + £560 yearly insurance = £4148 each year

Revenue : £0.50 per box x 600 boxes per week = £300 each week x 52 = £15,600 each year

If we calculate Bee's Gross and Net Profit based on these figures we get the following figures;

Revenue - Cost of Sales = Gross Profit

£15,600 - £2100.80 = £13,499.20

Gross Profit - Expenditure = Net Profit

£13,499.20 - £4148 = £9351.20

Bee has also produced a budget to estimate how much profit / loss he would make based on the 2012 Petrol prices of £1.42 per L.

Variable Costs : £1.42 per L x 40L = £56.80 per week x 52 = £2953.60 each year

Fixed Costs : £299 van rental per month x 12 months = £3588 each year + £560 yearly insurance = £4148 each year

Revenue : £0.50 per box x 600 boxes per week = £300 each week x 52 = £15,600 each year

If we calculate Bee's Gross and Net Profit based on these figures we get the following figures;

Revenue - Cost of Sales = Gross Profit

£15,600 - £2953.60 = £12,646.40

Gross Profit - Expenditure = Net Profit

£12,646.40 - £4148 = £8498.40

As we can see from looking at these figures the increase in the fuel prices has a real impact on the overall profit that Bee makes. The difference for this business would be £852.80. Of course in business Bee would probably have to look to make back this £852.80, which would only be possible if he could increase revenue, such as charging companies more for delivering each parcel or trying to reduce his other costs such as his van rental or insurance.

Hopefully you have followed the calculations and the concepts that have been covered in this article? The whole purpose is to highlight the impact that external factors have on a business and how different concepts, such as business finance can be linked into this.

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