3.1 - introduction to finance

• Capital expenditure


  Finance spent on fixed assets (or non-current assets) used repeatedly in the long term to generate sale revenue
• Revenue expenditure


  Finance spent on the daily operations of a business, such as the payment for wages, salaries, raw materials, rent and utility bills
• Factors to consider when selecting sources of finance

  • Availability of the finance
  • Cost of finance (usually from interest charges)
  • Time period of repayment
• Sources of finance


  • Start up, trust fund, savings
  • Borrow money, family, bank, crowdfunding, business angels, loan shark
• Capital expenditure


  • Items of monetary value that have a long-term function for business, so can be used repeatedly
  • Fixed assets are not intended to be sold (in the short term) but used for the purpose of production
  • Examples: land, buildings, capital equipment, machinery, and commercial vehicles, furniture, fixture, fittings, computers, its systems, intellectual property, mergers and acquisitions, property and premises
• Reasons for capital expenditure


  • To add extra production capacity as the business grows
  • To improve efficiency by utilising the latest technology, including IT systems and production technologies
  • To replace worn-out damaged and/or obsolete (outdated) capital equipment and machinery
  • To comply with changing legislation and regulations, such as green technologies
• The main challenges of capital expenditure for most businesses are the high cost involved and the limited sources of finance available for such investments
• In making capital expenditure decisions, managers often have to consider the expected return on investment by using methods of investment appraisal
• Revenue expenditure


  • Generates value to the business today rather than in the future
  • Expenses are incurred by businesses as a result of producing goods and services
  • Examples: Advertising and promotion, energy cost, freight and delivery, insurance, office supplies and administration, raw materials and components, rent
• Cost must be controlled so that the firm's sales revenue is sufficient to cover production costs, enabling the business to earn profits
• Capital expenditure is important for implementing change in organizations


  Revenue expenditure is vital for the sustainability of organization
• Opportunities for capital expenditure that could have changed the fortune of Blockbuster


  • Merged with Netflix
  • Started streaming
  • Maintained support for the website
• Opportunities for revenue expenditure that could have sustained the success of Blockbuster


  • Delivering to house for returns or purchases
• Why Blockbuster failed


  • Should have bought a cable company
  • Should have bought Netflix
• Revenue expenditure refers to the finance spent on the daily operations of a business, such as the payment for wages, salaries, raw materials, rent and utility bills
• Capital expenditure is the finance spent on fixed assets (or non-current assets)
• Sole traders' main source of finance is their personal savings
• Larger and more established businesses can seek other sources of finance for capital expenditure purposes such as selling shares on a stock exchange