HookWilko's shelves were empty before its tills were
On 10 August 2023, Wilko — a 93-year-old family-owned chain with around 400 stores and 12,500 staff — entered administration, one of the biggest high-street failures since Woolworths in 2008. The strange part: Wilko had been profitable for decades, and had reportedly paid its owning family some £77 million in dividends over the previous ten years. What killed it was a chain reaction in its cash. In early 2023, credit insurers — who protect suppliers against customers not paying — withdrew cover on Wilko. Suppliers, newly exposed, demanded cash up front. Short of cash, Wilko could not fill its shelves; gappy shelves cut sales; falling sales deepened the cash hole. A roughly £48 million sale-and-leaseback of its Worksop distribution centre bought months, not survival.
Notice what the story is not: a single catastrophic loss. It is a company running out of timing. Section 1.6 hands you the four instruments on any business dashboard — revenue, costs, profit and cash — and insists on keeping the last two separate, because profit is an accounting verdict on a period; cash is whether you can pay Friday's wages. Wilko's staff learned the difference the hard way. You get to learn it here.
ModelRevenue and costs — the two moving lines
Total revenue is price times quantity sold: TR = P × Q. Both halves move, and usually against each other — raise the price and some customers walk, so whether revenue rises depends on how many (a question 2.2 formalises with elasticity; for now, hold on to the trade-off itself).
Costs split by their relationship to output. Fixed costs do not vary with output in the short run: rent, salaries, insurance, business rates — all owed in full whether the shop serves one customer or a thousand. Variable costs rise with every unit made: ingredients, packaging, the energy that runs the ovens. Total cost = fixed + variable, and average cost — TC ÷ Q — falls as output spreads the fixed costs thinner. That is why scale matters, and why quiet shops are lethal: Wilko's rent bill did not shrink one pound as its sales fell. When an extract gives you a firm's costs, sort them into the two buckets before doing anything else; the whole of break-even analysis stands on that sorting.
MechanismBreak-even — where the two lines cross
Profit = total revenue − total cost: the fundamental identity of the section. From it comes the most useful small tool in business economics. Each unit sold contributes its price minus its variable cost towards paying the fixed costs — the contribution per unit. Divide fixed costs by that contribution and you get the break-even output: the quantity at which the firm neither profits nor loses. Sales beyond it are the margin of safety — how far demand can fall before losses begin.
Break-even is a planning tool, not a prophecy: it assumes the price holds, variable cost per unit is constant, and everything made is sold. Examiners reward candidates who use it AND name a limitation in the same breath.
An independent café pays £4,000 a month in fixed costs (rent, salaries, insurance). A coffee sells for £3.20 and its variable cost — beans, milk, cup, energy — is £1.20. Contribution per cup = £3.20 − £1.20 = £2.00. Break-even = £4,000 ÷ £2.00 = 2,000 cups a month. Selling 2,600 cups gives a margin of safety of 600 cups and profit of 600 × £2.00 = £1,200. Double-check it the long way: TR = 2,600 × £3.20 = £8,320; TC = £4,000 + (2,600 × £1.20) = £7,120; profit = £1,200. ✔ Both routes agree — always run the second as your check. Now the landlord adds £400 to the rent: break-even rises to £4,400 ÷ £2.00 = 2,200 cups, the margin of safety drops to 400 cups, and profit falls a third to £800. One rent review, one-third of the profit — that sensitivity is exactly what the model exists to reveal.
ModelProfit and loss — the verdict and what it funds
Profit does three jobs at once. It is the reward for enterprise — the residual payment for risk you met in 1.2, paid last and never guaranteed. It is a signal: sustained profit says 'society values this use of resources', sustained loss says 'stop', and firms that ignore the second message exit — the price mechanism's incentive function operating inside the firm. And it is a source of finance: retained profit is the single largest funder of UK business investment, cheaper than any loan because it carries no interest and surrenders no control.
Keep profit and revenue rigorously apart, because their scales deceive. Tesco's revenue in its 2023–24 year was roughly £68 billion — but operating profit was around £2.8 billion, about 4p of profit for every £1 through the tills. Supermarkets run on thin margins and huge volumes; a software firm may keep 30p in the pound on a fraction of the turnover. A firm can also make a loss and rationally continue in the short run — if revenue covers its variable costs and pays down some rent, closing costs more than trading — but only while there is cash to trade with. Which is the bridge to the section's final, fatal idea.
CaseCash flow — the difference between a bad year and a funeral
Profit and cash part company constantly in ordinary business. Sell £50,000 of goods on 60-day trade credit and the profit is booked today, the cash arrives in two months — wages are due Friday. Stock consumes cash long before any customer pays; buying equipment drains cash in one lump the accounts spread over years. A firm is insolvent when it cannot pay its debts as they fall due — and the courts do not ask whether it was profitable on paper.
Run Wilko as the mechanism. Credit insurers withdrew cover → suppliers stopped offering trade credit and demanded cash up front → Wilko's cash cycle, built on selling stock before paying for it, reversed overnight → gaps on shelves → revenue fell → fixed costs (rent on 400 stores, wages for 12,500 staff) did not → the hole widened until administration. Every management response the spec lists made an appearance: cash-flow forecasting came too late; the £48 million sale-and-leaseback raised cash by creating a permanent new fixed cost (rent on a warehouse it used to own); an overdraft extends the runway at nearly 40% EAR. The evaluation examiners reward is the time-buyer versus cure distinction: destocking, delaying payables and leasebacks all buy weeks, but only restored profitability — revenue reliably above total cost — refills the tank. If the extract's firm has a cash problem AND a profit problem, say which is which, and which one is terminal.
VocabularyKey terms the mark scheme pays for
TrapsMisconceptions that cost marks
ExamWhat examiners want
Calculations in 1.6 follow a ritual Edexcel rewards mechanically: state the formula, substitute the extract's numbers, give the answer WITH its unit, then interpret in one sentence ('the margin of safety is 400 cups, so a fall in sales of about 15% wipes out all profit'). On break-even, method marks survive arithmetic slips — but the strongest habit is the double-check: compute profit both by margin-of-safety × contribution and by TR − TC, and confirm they agree before moving on.
On the data questions, the discriminator sentence — the one that separates level 2 from level 4 — is the diagnosis: does this firm have a PROFITABILITY problem (revenue below total cost, structurally) or a LIQUIDITY problem (viable trading, broken cash timing)? Name it, evidence it from the extract, then evaluate the fixes accordingly: overdrafts, destocking and sale-and-leasebacks buy time but add future cost; only prices, volumes or cost structure cure profitability. Wilko is your quotable case — a liquidity crisis that revealed, and then became, a profitability crisis — and one dated real example deployed precisely is worth a page of theory.