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.
Revenue Expenditure
Revenue Expenditure refers to all payments for the daily running of a business. It is the finance spent by the business on all costs and purchasing assets other than Fixed Assets – Current Assets.
The finance for Revenue Expenditure usually comes from short-term sources of finance. It is because these daily business expenses will need to be paid within one year or less, so only need short-term funding.
Specifically, Revenue Expenditure includes paying for direct costs of making products including wages for production workers, as well as purchasing raw materials, packaging and paying for transportation. It also includes the payment of indirect costs such as rent, salaries for managers, insurance, legal fees and advertising.
Revenue Expenditure will also include financing Research and Development (R&D) of new products and/or entering into new markets. These activities are supposed to generate revenue for the firm in the future.
All in all, daily business costs must be constantly controlled, so that the business can generate enough sales revenue to earn a profit.
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.
