Key Idea: Finance is the money a business uses to start, survive and grow. At HL, Topic 3.1 still covers the same foundations as SL, but students are expected to classify finance-related items more precisely and use that distinction accurately in case-study analysis and accounting contexts.
What businesses need finance for
- Start-up costs — equipment, rent, stock, legal setup
- Day-to-day running costs — wages, bills, marketing, suppliers
- Growth — expansion, new branches, new products, new markets
- Survival — covering costs during difficult periods
- A profitable business can still fail if it runs out of cash
🏗️ Capital expenditure: Spending on **long-term assets**. Usually lasts **more than 1 year**. Examples: machinery, vehicles, buildings, IT systems. Shown on the **balance sheet / statement of financial position**.
🔄 Revenue expenditure: Spending on **day-to-day running costs**. Used up **within 1 year**. Examples: wages, rent, utilities, advertising, inventory purchases. Shown in the **income statement / profit and loss account**.
Fast memory rules
- If it helps the business for years → probably capital
- If it keeps the business running now → probably revenue
- Buying a van = capital
- Fuel for the van = revenue
- Building an extension = capital
- Repairing the building = revenue
High-yield HL expectations
- HL students should classify spending accurately in financial statements and business decisions
- Repairs and maintenance are usually revenue expenditure, even if the asset itself is long-term
- Capital expenditure usually improves long-term capacity; revenue expenditure supports current operations
- Misclassifying expenditure can distort profit, asset values and business decisions
Profit ≠ cash flow. This is one of the most important finance ideas in the whole course.
In finance questions, do not just label an item as capital or revenue. Explain why it belongs there and what that means for the business or the accounts.
Past-paper tip: HL finance markschemes reward precision. Use the exact business term, show working when relevant, and include the correct sign or label where needed.
Important: Common trap: students see a physical asset and assume the cost must be capital expenditure. That is wrong for repairs, servicing and maintenance.
- Identify if the question is about purpose of finance or expenditure type
- Use precise terms: start-up, operating, expansion, capital, revenue
- Explain clearly in 1–2 sentences
- Apply to the business in the case
- Ask: does this create a long-term asset or support current operations?