3.1 Introduction To Finance Flashcards
State 4 reasons of the importance of finance for business?
to fund various activities, including:
• Starting up – Initial capital to launch operations
• Upgrading capital equipment – Purchasing or maintaining essential machinery, tools, and technology
• Expansion – Entering new markets or ⬆️ production capacity
• Daily operations – Covering routine costs such as wages, rent, and utilities
Define capital expenditure + state examples
Investment in long-term assets that enhance the company’s production capacity, efficiency, or market position.
Assets used to generate income over multiple years and appear in the balance sheet rather than the income statement.
Eg: Buildings, machinery, vehicles, research & development
State 3 impacts of capital expenditure
• ⬆️ operational efficiency by modernising equipment
• ⬆️ earning potential by ⬆️ productivity
• Supports business growth by expanding capacity + market reach
Define revenue expenditure + state examples
business spending on daily operations + short-term needs that do not add to the long-term value of the company.
It is recorded in the profit and loss account as it directly affects the company’s profitability in a given period.
Eg. Raw materials, salaries, rent, delivery costs
State 3 impacts of revenue expenditure
• Maintains business operations by covering essential costs
• Does not increase the firm’s asset value but ensures continuity
• Ensures staff productivity by providing salaries + resources
What are the risks of insufficient revenue expenditure (4)
• Insolvency – Business closure due to lack of funds
• Employee dissatisfaction – Workers refusing to work without pay
• Supply chain disruptions – Suppliers halting deliveries due to non-payment
• Service disconnections – Utility companies stopping essential services
State differences between capital and revenue expenditure
Capital Expenditure
Long-term
Adds to asset value
One-time investment
Balance Sheet
Growth + expansion
High-cost investments
Improves operational capacity
Revenue Expenditure
Short-term
Does not add to asset value
Recurring costs
Profit & Loss Account
Daily operations
Regular, smaller costs
Maintains existing operations
Which internal sources of finance are used for capital and revenue expenditure?
Revenue. Capital
Retained profits. ✔️ ✔️
Personal savings. ✔️. ✔️
Sale of assets. ❌. ✔️
(Sale assets can be used for revenue expenditure inc ashes of extreme liquidity issues)
Which external sources of finance are used for capital and revenue expenditure?
Revenue. Capital
Share capital. ❌. ✔️
Loan capital. ❌. ✔️
Overdrafts. ✔️ ❌ bc of high interest rates
Trade credit. ✔️ ❌ bc is short term for typically for managing cash flows
Crowdfunding. ❌ ✔️
Leasing. ❌ ✔️
Microfinance providers ✔️ ✔️
Business angels. ❌ ✔️ (typically for start-ups in need of capital investment, crowdfunding too)
