3.1. Introduction to Finance

The role of finances in business

All businesses need money capital to finance their various activities. 

• To start up or to expand the business

• To pay for its day-to-day expenses such as fuel and labor costs

• To provide a reward for the owners for taking the risk in starting a business

• To pay taxes to governments and other authorities.

They provide a means to measure the performance of a business by the amount of profits and risk of collapsing.

Capital expenditure

Finances spent on fixed assets

Expenditure on items required to start up or to expand a business, shown on a business's statement of financial position (or balance sheet aka), mainly non-current assets.

It has no immediate effect on profits but essential if a firm is to generate long-term profits.

Examples of capital expenditure

• Capital equipment (Production, restore, transportation)

• Furniture, fixtures and fittings

• Computers & IT systems

• Intellectual property

• Machinery

• Mergers & acquisitions

• Property & premises (a house or building, together with its land and outbuildings, occupied by a business or considered in an official context)

• Vehicles

Revenue expenditure

Finances spent on daily runnings.

It is essential to production but, if not controlled, can have an immediate and damaging effect on a business's profit.

Examples of revenue expenditure

• Advertising & Promotion

• Energy costs

• Freight & Delivery

• Insurance

• Office supplies & administration

• Raw materials & components

• Rent

• Wages & salaries