3.1 Introduction to finance

Full video class on YouTube, summary and notes on Instagram, class extracts on TikTok, text below. Have fun!

The main point of this class is to explain two ways in which organisations spend money.

Of course, finance is very important to businesses. Finance is required for all stages of business development: for setting up an organisation, for running it, for expansion. In addition, there are different sources of finance that are appropriate in different kinds of situations and for different types of business entities: what works for sole trades might not work for MNCs. The main purpose of finance is to spend it. There are two main types of spending: capital expenditure and revenue expenditure.

Capital expenditure (CAPEX) refers to finance spent on fixed assets (land, buildings, equipment, vehicles, etc.). Fixed assets is any property that an organisation uses for more than 1 year. You can find CAPEX of your favourite company inside their annual report in Balance Sheet or Cash Flow Statement section (we’ll learn more about these financial statements later in Unit 3). Annual report for any publicly held company is easily downloadable from their website.

Revenue expenditure refers to payment for the daily running of the business (wages, raw materials, electricity, etc.). Basically, revenue expenditure is the same thing as operating expenses (OPEX), which refer to short-term (less than 1 year) spending. The financial statement where you can find revenue expenditure (or OPEX) of your favourite company is called Profit & Loss Account (or Income Statement) that we’ll learn later in Unit 3.

So, organisations can spend money in two ways: for long-term assets that they use for more than one year (capital expenditure) and for short-term expenses that are within 1 year (revenue expenditure). However, finance is limited, so if there’s too much capital expenditure, then you’ll have a lot of long-term assets but may be at risk of not being able to pay for daily running of the business. If there’s too much revenue expenditure, then you might be able to sustain the operations, but be at risk of not being able to grow and expand. So, in order to avoid either of these scenarios, learn IB Business Management with Mr Ilia and learn to be Balanced, as stated in the IB Learner Profile.

Make sure you can define all of these:

1. Capital expenditure
2. Revenue expenditure
3. Fixed assets
4. Operating expenses