3.

1 - Introduction to Business Finance

- The finance function of the business oversees the monetary exchanges that take place in
order for the business to function in both the short-term and the long-term.
- Initially, the business will need start-up capital to be able to purchase the necessary
equipment and pay the relevant costs to begin to function.
- After this, working capital is essential in ensuring that the business has enough cash in the
bank to continue operating.

The management of business finance can be split into two areas:

- Revenue Expenditure: (Short-Term revenue generation)
- Is the cash for the daily running of a business such as wages and electricity.
- Capital Expenditure: (Long-Term revenue generation)
- Are the funds used by a company to acquire or upgrade physical assets such as
property, industrial buildings or equipment.
- This type of outlay is made by companies to maintain or increase the scope of their
operations.
- These expenditures can include everything from replacing a roof to building a brand-
new factory.
- The difference between the two is that revenue expenditures are costs that are incurred on
a regular basis and the benefit from these costs is obtained over a relatively short period of
time.
- Whereas capital expenditures are typically one-off purchases of tangible (physical) assets
that are relatively expensive.

Copy and complete the table below in your book:

Cost Revenue or Capital How do you know? Explain

Expenditure?

Raw Materials Revenue expenditure Since they are typically utilised

in the production process and
directly contribute to
generating revenue.

Wages/Salaries Revenue expenditure Since they are paid to

employees for their services,
which are essential for the
ongoing operation for the
business in generating
revenue.

Rent Revenue expenditure Since it is the cost incurred for

using a property to carry out
business activities. It is paid
 regularly and is necessary for
the day-to-day operation of
the business.

Tools and Equipment Capital expenditure Since they are tangible assets
that are used in the production
process and have a useful life
extending beyond the current
accounting period. The cost of
acquiring these assets is
capitalised and depreciated
over the long-run.

Vehicles Capital expenditure Since they are tangible assets

used in the business
operations and have a useful
life beyond the current
accounting period.

Interest payments Revenue expenditure Since they are expenses

incurred for borrowing funds,
which are necessary to finance
day-to-day operations or
capital invesments. They are
part of ongoing financial
operations.

Research and Development Capital expenditure Since they involve creating

new products or improving
existing ones, which can
provide future benefits to the
business. Although its costs are
typically incurred upfront, they
lead to the creation of
intangible assets or
enhancements to existing
products.

Buildings Capital expenditure Since they provide long-term

benefits to the business, such
as housing operations or
generating rental income. The
cost of acquiring or
constructing buildings is
capitalised and depreciated
over their useful life.