Finance and
Accounts
Business Management
Alexia Puig Bello
,3.1 INTRODUCTION TO FINANCE
Finance refers to the various available monies that an organization has to fund its business activities.
Finance is necessary for all businesses, from starting up a new business, to upgrading its capital equipment or to
funding its expansion plans in overseas markets.
ROLE OF FINANCE FOR BUSINESSES
Finance is necessary for all business, from starting up a new business, to upgrading its capital equipment or to
funding its expansion plans. Businesses need to various sources of finance to pay for their operational / daily
cost, such as:
• 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).
The finance department of an organization is responsible for overseeing its financial management. The
purpose, or need, for finance can be characterised as either:
capital expenditure or revenue expenditure
Revenue expenditure and capital expenditure are of equal importance to businesses.
CAPITAL EXPENDITURE
Capital expenditure refers to business spending on fixed assets or capital equipment of a business. It is regarded
expenditure on the long-term investment of an organization. Examples includes expenditure on:
• Buildings
• Tools
• Computers
• Machinery
• Vehicles
• Research and development
The finance to fund capital expenditure is normally from long term sources of finance(more than 12 months
from the balance sheet date or the firm's accounting period) .
Greater capital expenditure enables a business to pursue its growth and evolution.
For example, Tesla, the electric car manufacturer, has spent billions of dollars in the past decade in its strive to
gain market share.
1
,REVENUE EXPENDITURE
Revenue expenditure refers to business spending on its everyday and regular operations. These expenses have
to be paid in order to keep the business operational. Examples include expenditure on:
• Stocks of raw materials, components (semi-finished goods) and finished goods which as ready for
sale, paid to suppliers
• Delivery costs
• Utility bills (e.g. gas, electricity, water and telephone bills)
• Wages and salaries to employees
• Rental payments for the premises
• Monthly repayments on bank loans and mortgages
• Insurance premiums (for example, insurance cover for buildings, employee safety and vehicles).
• Shipping and delivery costs
Summary of the differences between revenue and capital expenditure:
Revenue Expenditure Capital Expenditure
Short-term tenure Long-term tenure
Does not add to the value of a firm’s non-current Adds to the value of a firm’s non-current assets
assets
Recurring (regular) expenditure No-recurring (one-off) expenditure
Provides short-term benefits Provides long-term benefits
Includes low-cost expenditures Represents significant investments in the firm
Expenditure reflected in profit and loss account Expenditure reflected in the balance sheet
Does not improve operational efficiency Improves the firm’s operational efficiency
KEY TERMS
Capital expenditure refers to business spending on fixed assets or capital equipment of a business.
Finance refers to the various available money that an organization has to fund its business activities.
Revenue expenditure refers to business spending on its everyday and regular operations.
2
, 3.2 SOURCES OF FINANCE
Finance is necessary for all business, from starting up a new business, to upgrading its capital equipment or to
funding its expansion plans. This section of the IB Business Management syllabus introduces the various sources
of finance available to different organizations.
Some of these sources are internal and others are external. Student also need to understand the
appropriateness of different sources of internal and external finance.
INTERNAL SOURCES OF FINANCE
Internal sources of finance are those that come from within the organization, from its own resources and assets,
without the help of a third party. Internal sources of finance do not have to be repaid to anyone, as they belong
to the owner or organization. There are three main sources of internal finance:
• Personal funds
• Retained profit
• The sale of assets.
PERSONAL FUNDS (FOR SOLE TRADERS)
Sole traders and partners, as types of businesses entities, usually use personal funds from their own savings to
finance their start-up businesses.
Advantages of using personal funds as an internal source of finance include the following points:
• Personal funds do not need to be repaid.
• There are no interest charges incurred either, unlike with external finance.
• By investing their personal funds, sole traders and partners have a better chance of being able to
borrow money if they need to, as it shows greater commitment to the business venture.
Whilst internal sources of finance are the cheaper of the two options, external sources of finance usually
generate much more funds for a business.
Disadvantages as an internal source of finance include the following:
• As sole traders represent relatively high risk, they are less likely to be able to secure external sources
of finance, so need to rely on their personal funds.
• Personal funds are rarely sufficient for most small businesses.
• Many entrepreneurs risk their entire life savings in a business venture. In particular, sole traders and
partners risk losing all their personal funds if the business venture fails.
RETAINED PROFITS
Profit exists when a firm’s total revenue exceeds its total costs. Profit belongs to the owners of the business, but
can be distributed as a financial reward for the owners and/or retained within the business as an important
source of internal finance.
Retained profit is thus the surplus funds that are reinvested in the business, instead of being distributed to the
owners (shareholders). Therefore, retained profit is also known as ploughed-back profit.
3
Accounts
Business Management
Alexia Puig Bello
,3.1 INTRODUCTION TO FINANCE
Finance refers to the various available monies that an organization has to fund its business activities.
Finance is necessary for all businesses, from starting up a new business, to upgrading its capital equipment or to
funding its expansion plans in overseas markets.
ROLE OF FINANCE FOR BUSINESSES
Finance is necessary for all business, from starting up a new business, to upgrading its capital equipment or to
funding its expansion plans. Businesses need to various sources of finance to pay for their operational / daily
cost, such as:
• 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).
The finance department of an organization is responsible for overseeing its financial management. The
purpose, or need, for finance can be characterised as either:
capital expenditure or revenue expenditure
Revenue expenditure and capital expenditure are of equal importance to businesses.
CAPITAL EXPENDITURE
Capital expenditure refers to business spending on fixed assets or capital equipment of a business. It is regarded
expenditure on the long-term investment of an organization. Examples includes expenditure on:
• Buildings
• Tools
• Computers
• Machinery
• Vehicles
• Research and development
The finance to fund capital expenditure is normally from long term sources of finance(more than 12 months
from the balance sheet date or the firm's accounting period) .
Greater capital expenditure enables a business to pursue its growth and evolution.
For example, Tesla, the electric car manufacturer, has spent billions of dollars in the past decade in its strive to
gain market share.
1
,REVENUE EXPENDITURE
Revenue expenditure refers to business spending on its everyday and regular operations. These expenses have
to be paid in order to keep the business operational. Examples include expenditure on:
• Stocks of raw materials, components (semi-finished goods) and finished goods which as ready for
sale, paid to suppliers
• Delivery costs
• Utility bills (e.g. gas, electricity, water and telephone bills)
• Wages and salaries to employees
• Rental payments for the premises
• Monthly repayments on bank loans and mortgages
• Insurance premiums (for example, insurance cover for buildings, employee safety and vehicles).
• Shipping and delivery costs
Summary of the differences between revenue and capital expenditure:
Revenue Expenditure Capital Expenditure
Short-term tenure Long-term tenure
Does not add to the value of a firm’s non-current Adds to the value of a firm’s non-current assets
assets
Recurring (regular) expenditure No-recurring (one-off) expenditure
Provides short-term benefits Provides long-term benefits
Includes low-cost expenditures Represents significant investments in the firm
Expenditure reflected in profit and loss account Expenditure reflected in the balance sheet
Does not improve operational efficiency Improves the firm’s operational efficiency
KEY TERMS
Capital expenditure refers to business spending on fixed assets or capital equipment of a business.
Finance refers to the various available money that an organization has to fund its business activities.
Revenue expenditure refers to business spending on its everyday and regular operations.
2
, 3.2 SOURCES OF FINANCE
Finance is necessary for all business, from starting up a new business, to upgrading its capital equipment or to
funding its expansion plans. This section of the IB Business Management syllabus introduces the various sources
of finance available to different organizations.
Some of these sources are internal and others are external. Student also need to understand the
appropriateness of different sources of internal and external finance.
INTERNAL SOURCES OF FINANCE
Internal sources of finance are those that come from within the organization, from its own resources and assets,
without the help of a third party. Internal sources of finance do not have to be repaid to anyone, as they belong
to the owner or organization. There are three main sources of internal finance:
• Personal funds
• Retained profit
• The sale of assets.
PERSONAL FUNDS (FOR SOLE TRADERS)
Sole traders and partners, as types of businesses entities, usually use personal funds from their own savings to
finance their start-up businesses.
Advantages of using personal funds as an internal source of finance include the following points:
• Personal funds do not need to be repaid.
• There are no interest charges incurred either, unlike with external finance.
• By investing their personal funds, sole traders and partners have a better chance of being able to
borrow money if they need to, as it shows greater commitment to the business venture.
Whilst internal sources of finance are the cheaper of the two options, external sources of finance usually
generate much more funds for a business.
Disadvantages as an internal source of finance include the following:
• As sole traders represent relatively high risk, they are less likely to be able to secure external sources
of finance, so need to rely on their personal funds.
• Personal funds are rarely sufficient for most small businesses.
• Many entrepreneurs risk their entire life savings in a business venture. In particular, sole traders and
partners risk losing all their personal funds if the business venture fails.
RETAINED PROFITS
Profit exists when a firm’s total revenue exceeds its total costs. Profit belongs to the owners of the business, but
can be distributed as a financial reward for the owners and/or retained within the business as an important
source of internal finance.
Retained profit is thus the surplus funds that are reinvested in the business, instead of being distributed to the
owners (shareholders). Therefore, retained profit is also known as ploughed-back profit.
3
