4.1 Financial resources and the main categories of expenditure
One common feature of any business is the occurrence of specific expenditures during their operations. This feature is similar to what happens in families, which in order to ‘function’ have to think about spending on day-to-day goods and services or on big expenses like a house. Similarly, business expenditures can represent either one-off or recurrent outlays and apply to almost every form of organisation. They can be broadly divided into two categories: revenue expenditures and capital expenditures.
Revenue expenditures (also referred to as operating expenditures), identified by the acronym REVEX in accounting, refer to those expenditures that are incurred by a business in the daily running of its activities and whose effect is always short-term (i.e. their benefits are enjoyed by the business within the current accounting year). The most common examples of this type of expenditure are wages and salaries, rent expenses, utility bills, insurance policies, payments for repairs and maintenance, taxes, and interest on borrowed money. Table 12 shows what revenue expenditure looks like in the case of EasyJet Plc. Total expenditure for wages and salaries (highlighted) increased from £570 million for 2017 to £669 million in 2018.
Table 12 EasyJet’s total expenditure for wages and salaries (highlighted) 2017–18
|The average monthly number of people employed by easyJet was:|
|Flight and ground operations||12,391||10,932|
|Sales, marketing and administration||713||723|
|Employee costs for easyJet were:|
|£ million||£ million|
|Wages and salaries||669||570|
|Social security costs||86||73|
|Total 847||Total 717|
Capital expenditures, identified by the acronym CAPEX in accounting, refers to those outflows of funds aimed at acquiring or improving the working capacity of any non-current (i.e. long term) asset. They can be seen as a long-term investments to reach future financial gains. The Cambridge Advanced Learner's English Dictionary defines investment as ‘the act of putting money, effort, time, etc. into something to make a profit or get an advantage’.
The investment decision and consequent expenditure is a very important aspect of a business’ functioning. Given that these types of expenses are usually massive, the total amount is ‘capitalised’, which means that the disbursement is spread over the projected residual useful life of the specific asset. An example of a capital expenditure is the purchase of a building or property. This is usually financed through debt, or mortgages. Acquiring or upgrading equipment such as machinery, software, or even vehicles, are other examples of capital expenditures. Table 13 shows the amount of capital expenditures reported in the accounts of EasyJet Plc. Total capital expenditures (highlighted) increased from £586 million for 2017 to £931 million in 2018.
Table 13 EasyJet’s total capital expenditures (highlighted) in 2017–18
|Year ended 30 September||Year ended 30 September|
|£ million||£ million|
|Cash flows from operating activities|
|Cash generated from operations||1215||949|
|Ordinary dividends paid||(162)||(214)|
|Interest and other financing charges paid||(29)||(30)|
|Interest and other financing income received||11||9|
|Net tax paid||(74)||(51)|
|Net cash generated from operating activities||961||663|
|Cash flows from investing activities|
|Purchase of property, plant and equipment||(931)||(586)|
|Purchase of intangible assets||(81)||(44)|
|Net decrease/(increase) in money market deposits||269||(363)|
|Proceeds from sale and operating leaseback of aircraft||106||115|
|Net cash used by investing activities||(637)||(878)|
Capital expenditures play a fundamental role in the growth of businesses. They involve investments of large amounts of money, but also carry uncertainty and a commitment over the long term.