Organisations and the financial system
Organisations and the financial system

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

Organisations and the financial system

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

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:    
2018 2017
Number Number
Flight and ground operations 12,391 10,932
Sales, marketing and administration 713 723
  13,104 11,655
Employee costs for easyJet were:
2018 2017
£ million £ million
Wages and salaries 669 570
Social security costs 86 73
Pension costs 75 61
Share-based payments 17 13
  Total 847 Total 717
(EasyJet Plc 2018)

Capital expenditures

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
2018 2017
£ 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)
(EasyJet Plc 2018)

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.

B294_1

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371