The need for business finance — practice questions

Capital expenditure: Shop fit-out, coffee machines, furniture — long-term assets on balance sheet (10.1.1).

Revenue expenditure: First month's rent, staff wages, coffee beans, utilities — day-to-day running costs.

Working capital need (5.1.2): Cash to cover gap between paying suppliers and receiving customer cash — especially first months when sales building.

Total finance need: CapEx + 3–6 months working capital buffer before branch breaks even (5.4.4).

Step 1: Calculate Total Capital Expenditure (Capex) Capex is spending on non-current assets that provide a long-term benefit.

• New Machinery: $150,000
• Installation Cost (capitalised as part of the asset's cost): $10,000
• Factory Extension: $80,000 Total Capex = $150,000 + $10,000 + $80,000 = $240,000

Step 2: Calculate Initial Revenue Expenditure / Working Capital Need This is spending on day-to-day operations and launch costs.

• Additional Raw Materials: $45,000
• Additional Staff Wages: $30,000
• Marketing Launch Campaign: $5,000 Total Initial Revenue Expenditure = $45,000 + $30,000 + $5,000 = $80,000

Step 3: Calculate Total Finance Needed This is the sum of the capital investment and the initial funds for operations.

• Total Finance = Total Capex + Total Initial Revenue Expenditure
• Total Finance = $240,000 + $80,000 = $320,000

Final Answer: Precision Parts Ltd needs to secure a total of $320,000 for the expansion. This consists of $240,000 for capital expenditure and $80,000 to cover initial operating costs and working capital.