Unit 3 – Finance and Accounts
3.1 – Introduction to Finance
Finance is the management of money and other assets. In business, it is essential for funding operations, investment, growth, and survival. The finance function ensures resources are available at the right time for the right purpose.
- Supports daily operations (paying staff, purchasing inventory)
- Funds investment in assets (machinery, technology, expansion)
- Allows for planning, forecasting, and control of expenditure
- Ensures liquidity, solvency, and financial health
Role of Finance in Business
- Startup & Growth: Provides capital to launch, expand, adapt to market change.
- Investment: Finance pays for equipment, property, R&D, new products.
- Working capital: Keeps cash flowing to pay bills, wages, and suppliers on time.
- Survival: Good finance management prevents bankruptcy and supports recovery in bad times.
- Control: Finance supports performance measurement (budgets, ratios, targets).
\[ \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} \]
Capital Expenditure
Capital expenditure is spending on long-term assets that will support production or business for more than a year.
- Examples: Land, buildings, machinery, vehicles, technology, patents
- Recorded as non-current assets on the balance sheet
- Essential for expansion, efficiency, long-term competitiveness
Revenue Expenditure
Revenue expenditure is spending on daily operating costs that are fully consumed within the year.
- Examples: Wages, raw materials, rent, utilities, maintenance, office supplies
- Recorded as expenses on the profit & loss account (income statement)
- Essential for running the business smoothly
Comparison Table: Capital vs Revenue Expenditure
| Aspect | Capital Expenditure | Revenue Expenditure |
|---|---|---|
| Purpose | Buy/improve long-term assets | Pay for day-to-day costs |
| Examples | Machines, vehicles, tech, property | Wages, materials, rent, utilities |
| Where recorded | Balance Sheet (Non-current assets) | Income Statement (Expenses) |
| Impact | Used for years, adds lasting value | Immediate, supports current output |
| Accounting treatment | Capitalized, depreciated over time | Expensed in period incurred |
Key Takeaways
- Finance enables all business activities—without it, growth and survival are impossible.
- Capital expenditure creates the long-term platform for production and expansion.
- Revenue expenditure keeps day-to-day operations running efficiently.
- Understanding the difference is vital for budgeting, investing, and analyzing business health.