Business finance
Why finance is needed
- Business finance is the money to start, run and grow a firm.
- capital expenditure — on fixed assets that last (machines, buildings).
- revenue expenditure — on day-to-day running (wages, rent, materials).
Practice
Buying a new factory machine is an example of:
Capital expenditure buys long-lasting fixed assets; revenue expenditure covers day-to-day running.
Working capital
$$\text{working capital} = \text{current assets} - \text{current liabilities}$$
- current assets become cash within a year (cash, inventory, money owed to the firm).
- current liabilities are debts due within a year.
- Too little working capital → the firm can't pay its bills.
Practice
Current assets are 50,000 and current liabilities are 30,000. What is the working capital (in dollars)?
Working capital = current assets − current liabilities = 50,000 − 30,000 = 20,000.
Cash is not profit
- Profit = revenue − costs over a period; cash = the money it has right now.
- A firm can be profitable but still run out of cash (e.g. customers haven't paid yet).
- Many firms fail from running out of cash, not from low profit.
Practice
A profitable business can still run out of cash.
Profit and cash differ — e.g. if customers have not yet paid, a profitable firm can lack cash to pay bills.
You've got it
Key idea
- capital expenditure = lasting assets; revenue expenditure = day-to-day
- working capital = current assets − current liabilities
- cash ≠ profit — a profitable firm can still run out of cash