TOPIC 3.1
Capital expenditure
- Refers to the spending on a firm’s capital assets & the long term-investment a business has in
these assets
- Capital assets = an asset that the business owns which will stay in the business for a long period
of time
- Investing in capital expenditure allows a firm to progress in the future
Examples
➔ Purchases of land, buildings and machines
Revenue expenditure
- Refers to the spending on a firm’s general operational costs (operational costs include both
variable and fixed costs)
- It is funded using short term or long term sources of finance
- It is the cost a firm has to pay on a daily/weekly/monthly basis in order to stay in business
- If a firm cannot pay revenue expenditure, it will go out and business rapidly (insolvency), where
employees will refuse to work & utility companies may shut off supplies
Examples
➔ Paying wages & salaries to workers, suppliers, utility bills, tax bills & repayments of debts
(mortgages & loans)
Forms of Revenue Expenditure
Rev. Expenditure Examples
Premises Costs (building costs) Renovations/repairs Heating Lighting
Staff Costs (maintenance & Travelling overseas to
retaining of workers) recruit new staff members
Administrative Costs Visas for new staff Rental contracts for Health insurance/medicals
(‘paperwork’ that goes with staff for staff
running a business)
Selling & Distribution Costs Marketing Websites
(efforts to attract customers to
product)
Finance Costs (external sources Interest of loans Mortgages/rent Leasing of cars to employees
of debt finances/banks)
Stock Purchases (inventory) Warehouses to store Cost of
, materials storage/warehousing
Financial Management Planning/Strategies
➔ The planning & monitoring of a business's financial resources in order to allow it to achieve its
long term financial goals
Strategic Planning (capital & revenue expenditure)
Occurs from 3-5 years but can take up to 10 years
E.g: become a market leader in the aviation industry (needs assets & marketing)
Tactical Planning (capital & revenue expenditure)
Occurs between 1-2 years
E.g: increase the size of the fleet (increasing assets)
Operational Planning (revenue expenditure)
Occurs day to day basis
E.g: Undertake a research of new planes & train the staff
Financial Objectives
1. Profitability
2. Growth
3. Efficiency (most output generated from least amount of input)
4. Liquidity (cash availability)
5. Solvency (assets are greater than liabilities)
Acronym: P LEGS
Internal Sources of Finance
,Personal Funds/Owner’s Equity
- Money invested by the owner(s) of a business
- Equity finance
- It may be short/medium or long term loan
- May cause loss on any potential interest on savings &
savings in general
- Very risky investment - owners at risk for losing own
funds if company goes bankrupt
Used by:
- Sole traders or partnerships/companies with little
experience when personal funds are only available finances
- To start up a business
- Owners of larger companies in times of a crisis
Retained Profit
- Essentially the company’s savings & the money it has leftover after paying all expenses, costs,
dividends and taxes at the end of each trading year
- Equity finance & primary source of finance
- Retained profits do not have to be repaid - not stuck in debt
- May take many years before funds are in place - potential lost sales while waiting for retained
profits to be of sufficient size & loss of dividends
Used by:
- When a business wants to invest a new capital project (new building) - may choose to save up
retained profits to pay for project
- Primary source of finance for most companies
Sale of assets
- When a corporation is in need of some cash, it may choose to sell one of its fixed assets.
- Raises massive amounts of money which can be reinvested into new projects
- Loan length depends on asset size
- It is unlikely that money raised from sales of assets will be sufficient enough alone, therefore
additional finance sources are needed
Used by:
- When a company changes objectives & needs funds to invest in a new strategy
- When a company wants to update technology
External Sources of Finance
, Equity Finance
- When investors offer equity finance, in return they demand ownership of a part of the company
Advantages Disadvantages
Does not have to be repaid unless owner leaves business Lower profits and lower returns for owner of business
(no interest - cheaper than other payment sources)
Investors who contribute equity have control over finance Expectation that an owner has to return the investments
in a business to shareholders (dividends)
Less risk for business & owner Loss of control/ownership of business
Low ‘gearing’ (uses resources of owner and no external
sources of finance)
Share Capital
- Money/capital raised through the issue of shares, by selling shares to new investors on the stock
market
- Equity finance
- It is a long term loan
- Suitable for companies & corporations, to raise vast amounts of money
Business Angels
Capital expenditure
- Refers to the spending on a firm’s capital assets & the long term-investment a business has in
these assets
- Capital assets = an asset that the business owns which will stay in the business for a long period
of time
- Investing in capital expenditure allows a firm to progress in the future
Examples
➔ Purchases of land, buildings and machines
Revenue expenditure
- Refers to the spending on a firm’s general operational costs (operational costs include both
variable and fixed costs)
- It is funded using short term or long term sources of finance
- It is the cost a firm has to pay on a daily/weekly/monthly basis in order to stay in business
- If a firm cannot pay revenue expenditure, it will go out and business rapidly (insolvency), where
employees will refuse to work & utility companies may shut off supplies
Examples
➔ Paying wages & salaries to workers, suppliers, utility bills, tax bills & repayments of debts
(mortgages & loans)
Forms of Revenue Expenditure
Rev. Expenditure Examples
Premises Costs (building costs) Renovations/repairs Heating Lighting
Staff Costs (maintenance & Travelling overseas to
retaining of workers) recruit new staff members
Administrative Costs Visas for new staff Rental contracts for Health insurance/medicals
(‘paperwork’ that goes with staff for staff
running a business)
Selling & Distribution Costs Marketing Websites
(efforts to attract customers to
product)
Finance Costs (external sources Interest of loans Mortgages/rent Leasing of cars to employees
of debt finances/banks)
Stock Purchases (inventory) Warehouses to store Cost of
, materials storage/warehousing
Financial Management Planning/Strategies
➔ The planning & monitoring of a business's financial resources in order to allow it to achieve its
long term financial goals
Strategic Planning (capital & revenue expenditure)
Occurs from 3-5 years but can take up to 10 years
E.g: become a market leader in the aviation industry (needs assets & marketing)
Tactical Planning (capital & revenue expenditure)
Occurs between 1-2 years
E.g: increase the size of the fleet (increasing assets)
Operational Planning (revenue expenditure)
Occurs day to day basis
E.g: Undertake a research of new planes & train the staff
Financial Objectives
1. Profitability
2. Growth
3. Efficiency (most output generated from least amount of input)
4. Liquidity (cash availability)
5. Solvency (assets are greater than liabilities)
Acronym: P LEGS
Internal Sources of Finance
,Personal Funds/Owner’s Equity
- Money invested by the owner(s) of a business
- Equity finance
- It may be short/medium or long term loan
- May cause loss on any potential interest on savings &
savings in general
- Very risky investment - owners at risk for losing own
funds if company goes bankrupt
Used by:
- Sole traders or partnerships/companies with little
experience when personal funds are only available finances
- To start up a business
- Owners of larger companies in times of a crisis
Retained Profit
- Essentially the company’s savings & the money it has leftover after paying all expenses, costs,
dividends and taxes at the end of each trading year
- Equity finance & primary source of finance
- Retained profits do not have to be repaid - not stuck in debt
- May take many years before funds are in place - potential lost sales while waiting for retained
profits to be of sufficient size & loss of dividends
Used by:
- When a business wants to invest a new capital project (new building) - may choose to save up
retained profits to pay for project
- Primary source of finance for most companies
Sale of assets
- When a corporation is in need of some cash, it may choose to sell one of its fixed assets.
- Raises massive amounts of money which can be reinvested into new projects
- Loan length depends on asset size
- It is unlikely that money raised from sales of assets will be sufficient enough alone, therefore
additional finance sources are needed
Used by:
- When a company changes objectives & needs funds to invest in a new strategy
- When a company wants to update technology
External Sources of Finance
, Equity Finance
- When investors offer equity finance, in return they demand ownership of a part of the company
Advantages Disadvantages
Does not have to be repaid unless owner leaves business Lower profits and lower returns for owner of business
(no interest - cheaper than other payment sources)
Investors who contribute equity have control over finance Expectation that an owner has to return the investments
in a business to shareholders (dividends)
Less risk for business & owner Loss of control/ownership of business
Low ‘gearing’ (uses resources of owner and no external
sources of finance)
Share Capital
- Money/capital raised through the issue of shares, by selling shares to new investors on the stock
market
- Equity finance
- It is a long term loan
- Suitable for companies & corporations, to raise vast amounts of money
Business Angels
