Business Expenditure and Finance

Current v Capital Expenditure Definition of a Fixed Asset Internal v External Finance Short term/medium term/long term expenditure

In this chapter we will look at:

Questions to consider

What is the difference between current and capital expenditure with examples for each?

What is the difference between internal and external finance with an example for each?

What is the difference between short-term/medium-term/long-term expenditure.

Discuss 3 examples of short-term/medium-term/long-term expenditure.

BELIEVE IT OR NOT….SOME OF THIS STUFF WILL BE REVISION OF WHAT WE LOOKED AT IN PREVIOUS CHAPTERS

Current v Capital Expenditure

A business needs money to finance its expenditure. This money goes towards day to day items (current) and long term items (capital).

Can you remember these definitions with examples? Take 2 minutes to find them on your I-Pad. ( You can look at the next 2 slides for help if you need it)

From Our Expenditure Chapter 2

From Our Expenditure Chapter 2

Note- Another word for a long term asset is a FIXED ASSET- as its value doesn’t change with day-day activity- e.g. machine.

Therefore….

Current expenditure is known as short- term (up to a year)

Capital expenditure is known as medium- term (will be replaced every 3-5 years) or long- term (for the long term future) expenditure

Drag the following boxes into Short-Term/ Medium- Term/ Long-

Term ExpenditureShort Term Medium Term Long Term

Wages

Photocopier

Land

Buildings

Electricity Bill

Stationary

Delivery Van

Nuclear Power Plant

Furniture

Computer

Petrol Factory

Internal vs External

A business will match its source of finance to expenditure. There is no point in taking out a mortgage to buy a pencil for your desk or trying to use a credit card to pay for a few acres of land. You assess what you need and what source of finance suits you best.

Therefore, you must decide what source of finance you will use that will best benefit your company. These sources can be internal- as the money comes from inside the company )e.g. profits/ shares, or external- as the money comes from outside the company- e.g. bank loan.

Short-Term Finance

Firms Own Cash Internal

CreditorsExtrenal

Bank OverdraftExternal

Factoring of DebtorsExternal

AccrualsExternal

Own Cash: This is the firm using their own money available to pay for goods and services. You should take into account the opportunity cost of having the money in the bank earning interest.

Creditors: A creditor is a firm that supplies goods on credit- you buy now, pay later. A company therefore gets use of a good now and pays for it at a later date. This will free up cash to be used elsewhere in the business and allows you to pay for goods at a later date. Be careful as you owe creditors back the money once goods are sold.

Bank Overdraft: An agreement with the bank to overdraw and repay at a later date( see banking chapter).

Factoring of Debtors: A debtor is a person who owes us money and we are their creditor. Sometimes companies will need cash ASAP and what factoring does is buy the debt off you for less cash and then they will collect the full debt when it is due, giving you less money than your owed, but instant access to cash.

Accruals: Delay the payment of bills until the very latest time possible in order to keep money in your bank account.

Short- Term Finance

Medium-Term Finance

Term Loan(External)

Hire PurchaseExternal

LeasingExternal

Term Loan: Borrowing money from the bank to purchase an assest. Be mindful of interest rates

Taken from Personal Saving and Credit Purchasing Chapter

Medium-Term Finance

Long- Term Finance

SharesInternal

Long-Term LoanExtrenal

Retained Profits

Internal

DebenturesExternal

Sale and LeasebackExternal

GrantsExternal

Long- Term Finance

Shares: The firm sells shares to the public and uses the cash to pay for things. Any profits made are shared to the public

Long-Term Loans: This would be like a mortgage over a period of over 20 years. Repayments would need to be paid

Retained Profits: This is putting the firms profits back into the company

Debentures: A certificate issued that is secured against a long term debt. Interest is also paid

Sale and Leaseback: This is the selling of an assest and leasing back over time. The firm receives a large injection of cash and the rent back the property.

Grant: This comes from the government. It is used to set up or expand the business