Capital, or money, that is used in every business is categorized as Revenue Expenditure and Capital Expenditure.
After the start-up capital has already been generated to establish the business, the main purpose of finance now will be for its day-to-day running and for expansion purposes.
Capital Expenditure
Capital Expenditure is the finance spent by a business on purchasing Fixed Assets (Non-Current Assets).
Fixed Assets are expected to last for more than one year and they are not intended for resale in the short-term. They are kept for the purpose of generating money for the business and to determine the scale of a firm’s operations.
Examples of Fixed Assets include land, buildings, office equipment, factory machinery and vehicles. Replacing old technology that is obsolete, or is no longer working properly, requires Capital Expenditure too.
Also, one of the ways for business growth is expansion by acquiring or taking over other businesses. The finance needed in those deals – to buy out the owners of the other firms – will also count as Capital Expenditure.
The finance for Capital Expenditure tends to come from medium-term and long-term sources of finance. It is mainly because of the high cost of financing Fixed Assets. Fixed Assets have high value and long-term functionality. They can be used repeatedly and provide financial guarantee for securing additional loan capital.
Summary
While all businesses need money to finance their various activities, these two types of spending – Revenue Expenditure and Capital Expenditure – will be used for different aims. Also, they will be financed in different ways.
The length of time that the money is needed for will be a major factor influencing the final finance choice.
