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Define finance in Business Management.
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All Flashcards in Topic 3.1
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3.1.120 cards
Define finance in Business Management.
Finance is the money available to a business to fund its activities, operations and growth.
Money used to run/grow.
What is start-up finance used for?
Start-up finance is used to cover initial costs before the business earns revenue (e.g., equipment, premises, initial stock).
Costs before sales.
What does “adequate finance” mean?
Having the right amount of finance available at the right time to meet the business’s needs.
Right amount, right time.
Finance is the ______ a business uses to fund its activities and growth.
Money.
Simple definition.
State one reason why a business needs finance at start-up.
To pay initial set-up costs such as equipment, premises and initial stock before revenue is earned.
Before sales start.
Start-up finance covers costs before the business earns ______.
Revenue.
Before sales income.
What is operating finance (working capital) used for?
Operating finance is used to pay day-to-day running costs such as wages, bills, rent and inventory purchases.
Daily running costs.
State one consequence of not having enough finance to pay suppliers.
Suppliers may stop delivering inputs, causing production or sales to halt.
Suppliers stop supply.
Working capital is finance used for day-to-day ______.
Operations.
Running costs.
What is expansion finance used for?
Expansion finance is used to grow the business (e.g., new locations, new products, new markets, acquisitions).
Money for growth.
State one consequence of not having enough finance to pay employees.
Staff may leave (higher labour turnover), reducing productivity and service quality.
Unpaid staff leave.
State one reason why a business needs finance for day-to-day operations.
To pay running costs such as wages, rent, utilities and suppliers.
Keep operations running.
State one reason why a business needs finance for growth.
To fund expansion such as opening new branches, entering new markets or developing new products.
Expansion needs cash.
Give one example of start-up finance.
Buying initial equipment such as an oven for a bakery or computers for a new office.
Initial assets.
A profitable business can still fail without adequate ______ flow.
Cash.
Profit ≠ cash.
Why can a profitable business still fail?
Because it may run out of cash (cash-flow problems) and be unable to pay short-term obligations.
Profit ≠ cash.
Exam skill: What three purposes of finance should you always distinguish?
Start-up finance, operating (working capital) finance, and expansion finance.
3 purposes.
State one reason why inadequate finance can limit competitiveness.
The business may be unable to invest in new equipment, marketing or product development, allowing competitors to overtake it.
No investment.
Give one example of operating finance.
Paying monthly wages and rent while waiting for customers to pay invoices.
Cash gap.
What does the phrase “finance is the fuel of a business” mean?
Without finance a business cannot buy resources, pay costs or invest, so operations stop and the business cannot survive.
No money = no business.
3.1.225 cards
Classify: Buying a delivery van.
Capital expenditure (a non-current asset used for several years).
Long-term asset.
Define capital expenditure (capex).
Capital expenditure is spending on non-current assets that will be used by the business for more than one year.
Long-term asset spend.
Capital expenditure is spending on ______ assets lasting more than one year.
Non-current.
Long-term assets.
Define revenue expenditure (opex).
Revenue expenditure is spending on day-to-day running costs that are used up within a short period (usually within one year).
Running costs.
State the main difference between capital and revenue expenditure.
Capital expenditure buys/improves non-current assets lasting more than one year; revenue expenditure pays day-to-day running costs used up within one year.
Long-term vs day-to-day.
Classify: Petrol for the delivery van.
Revenue expenditure (used up quickly as a running cost).
Running cost.
Give one example of revenue expenditure.
Wages, rent, utilities, advertising, raw materials, or routine repairs and maintenance.
Used up quickly.
Give one example of capital expenditure.
Buying machinery, vehicles, land/buildings, or an IT system used for several years.
Lasts years.
Revenue expenditure is day-to-day running costs used up within ______ year.
One.
Short-term costs.
Which type of expenditure appears on the balance sheet?
Capital expenditure (as non-current assets).
Asset on BS.
Where is revenue expenditure recorded in the final accounts?
As an expense on the profit and loss account for the period.
P&L expense.
What is the key test to identify capital expenditure?
Ask whether the spending creates or improves an asset that will last more than one year.
Lasts > 1 year?
Which type of expenditure appears on the profit and loss account?
Revenue expenditure (as expenses).
Expense on P&L.
Classify: Monthly internet subscription.
Revenue expenditure (a recurring running cost).
Recurring cost.
Capital expenditure appears on the ______ sheet.
Balance.
Assets on BS.
Revenue expenditure appears on the profit and ______ account.
Loss.
Expenses on P&L.
Where is capital expenditure recorded in the final accounts?
As a non-current asset on the balance sheet (with depreciation over time).
Balance sheet asset.
Classify: Building an extension to a factory.
Capital expenditure (adds long-term value to a non-current asset).
Improves long-term asset.
Why does capital expenditure affect accounts differently from revenue expenditure?
Capital items provide benefits over several years, so their cost is spread over time through depreciation rather than expensed immediately.
Depreciation spreads cost.
What is the “one-year” test used for?
To decide if spending is capital (benefits last > 1 year) or revenue (used up within 1 year).
>1 year vs within year.
What is a common exam trap when classifying expenditure?
Repairs and maintenance are usually revenue expenditure because they do not create a new long-term asset.
Repairs ≠ new asset.
Classify: Repainting the office.
Revenue expenditure (maintenance, not a new long-term asset).
Maintenance.
Why is capital expenditure important for business growth?
It helps the business increase capacity, efficiency or quality using long-term assets (e.g., new machinery).
Invest to grow.
Exam skill: When classifying a cost, what question should you ask first?
Does it create or improve a long-term asset lasting more than one year? If yes → capital; if no → revenue.
Long-term asset test.
Why can misclassifying revenue expenditure be a problem?
It distorts profit figures and financial statements, leading to poor decisions.
Wrong profit.
Topic 3.1 study notes
Full notes & explanations for Introduction to finance
BM exam skills
Paper structures, command terms & tips
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