BM Topic 3.1: Introduction to Finance

Role of finance for businesses

Role of finance for businesses

1. Capital Expenditure

2. Revenue Expenditure

• the purchase of raw materials

• components and inventory

• the payment of wages, salaries, rent, insurance and utility bills (for gas, electricity, water and telephone bills).
  

Define ‘Capital Expenditure’

the finance spent on fixed assets (or non-current assets). These are items of monetary value that have a long-term function & benefits, so can be used repeatedly. They are not intended to be sold (in the short term) but used for the purpose of production. determines the scale of an organisation’s operations.
- sources of finance for capex tend to come from long-term sources because of the high cost of financing fixed assets
- these assets can also provide collateral (financial guarantees) for securing additional loan capital

• Buildings, Tools and equipment, Computers, Printers, Photocopiers, Machinery, Vehicles, Research and development, land

Reasons for Capital Expenditure (or investment expenditure)

1. to add extra production capacity as the business grows

2. to improve efficiency by utilising the latest technologies, including IT systems & production technologies

3. to replace worn-out, damaged and/or obsolete (outdated) capital equipment & machinery

4. to comply with changing legislation & regulations, such as green technologies

Define ‘Revenue Expenditure’

finance spent on the daily operations of a business (e.g. wages, salaries, raw materials, rent), including the payment of indirect costs (e.g. insurance, advertising spending). generates value to the business today, rather than in the future. expenses incurred by businesses as a result of producing goods or services, generating revenue.
- however, costs must be controlled so that the firm’s sales revenue is sufficient to cover production costs, thereby enabling the business to earn profit

Define ‘collateral’

Collateral refers to the financial guarantee for securing external loan capital to finance investment expenditure for business growth

Define ‘fixed assets (or non-current assets)’

items of monetary value that have a long-term function for businesses, so can be used repeatedly for the purpose of production. not intended for resale within the next 12 months of the balance sheet date

Define ‘finance’

the various available money that an organization has to fund its business activities