Business Management Finance Chapter

Types of expenditure

Capital expenditure and Revenue expenditure

Capital Expenditure

Investment spending on fixed assets (or non-current assets), such as the purchase of machinery, equipment, land, and buildings. This spending has long-term benefits for the organization

Revenue expenditure

Spending on the day-to-day running of a business, such as the payment of rent, wages, salaries, and utility bills. This spending generates revenue value today.

Fixed assets (or non-current assets)

Items of monetary value that have a long-term function for businesses (lasting more than 12 months) and are used repeatedly for the purpose of production

Collateral

The financial guarantee used for securing external loan capital to finance investment expenditure for business growth. This is something valuable promised to a lender as security; if the borrower cannot repay, the lender can take it.

Internal sources of finance

Funds that come from within the business.

Personal funds

The owner's own savings used to fund the business (typically for sole traders and partnerships). This involves no interest or repayments, and the owner keeps full control.

Retained profit (or Retained earnings)

The value of profits that a business keeps (after paying taxes and dividends to shareholders) to use for expansion or funding fixed assets. This is a source of finance that does not incur any interest charges.

Sale of assets

The selling of existing dormant assets (unused machinery, old equipment, etc.) to raise finance

External sources of finance

Funds that come from outside the organization.

Share capital

Money raised by selling shares in a limited liability company. This can raise large amounts for expansion, but dilutes ownership.

Initial public offering (IPO)

When a private company first sells shares to the public to become a public limited company (plc)

Loan capital

Borrowed funds that must be repaid with interest over time, obtained from commercial lenders like banks (e.g., bank loans, mortgages, debentures)

Debentures

Long-term loans issued by a business. Debenture holders are creditors who receive fixed or variable interest.

Overdrafts

A short-term financial service that allows a business to temporarily withdraw more money than is in its bank account, up to an agreed limit. This is useful for short-term cash flow issues but incur high interest.

Trade credit

A practice allowing a business to postpone payments for goods or services purchased, meaning the supplier (creditor) is paid later (usually 30–60 days)

Crowdfunding

Raising finance online from a large number of individuals for a small amount per person to fund a new business venture.

Leasing

A form of hiring where the lessee (customer) pays rental income to the lessor (leasing company) to use assets (e.g., machinery, equipment)

Sale-and-leaseback

A financing method where a business sells a fixed asset and immediately leases it back, allowing them to gain cash while retaining use of the asset.

Microfinance providers

Typically offer very small loans (microloans) often to small/start-up businesses with little collateral, providing access to finance that would otherwise be unavailable.

Business angels

Wealthy individuals who invest their own money for equity or partial ownership in high-growth, high-return businesses, often bringing experience and contacts.

Cost

The actual amount paid by the business to purchase the product from the retailer (or the input required for production).

Price

The sum paid by the customer to purchase a good or service.

Set-up costs

Items of expenditure needed to start a business, such as obtaining premises, purchasing machinery, and deposits.

Running costs

The recurring costs of operating the business, such as wages, salaries, insurance premiums, and purchasing stocks.

Fixed costs (TFC)

Costs of production that do not change with the level of output or sales

Variable costs (TVC)

Costs of production that change in proportion with the level of output or sales

Total Cost (TC)

The sum of total fixed costs and total variable costs TC = TFC + TVC

Direct costs

Costs specifically related to an individual project or the production of a particular product.

Indirect costs (or overheads)

Costs that cannot be clearly traced to the production or sale of any single product. These costs are generally fixed.

Revenue

Money coming into a business, usually from the sale of goods and/or services.

Revenue streams

The different sources from which a business derives its revenue

Sponsorship revenue

Income from a promotion where a company financially supports an event or organization to gain promotional benefits.

Dividends

A shareholder's share of the net profits distributed by a company

Final Accounts

The published annual financial statements—the Profit and Loss (P&L) Account and the Balance Sheet.

Profit and Loss (P&L) Account

A financial record showing a firm's trading performance (revenues and costs) over a period of time (usually 12 months), resulting in the final profit calculation