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Both costs and investments result in spending money. Costs are spending money to run the business and investments are spending money to prepare for the future.
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Quick reference
Cost and Investments
Both costs and investments result in spending money. Costs are spending money to run the business and investments are spending money to prepare for the future.
When to Use Revenues and Profits
Companies must decide when and how to spend money in the business. The allocation of money for costs and investments are initially decided at budgeting time and the final decisions are made on an ongoing basis.
Instructions
- Both costs and investments spend money.
- Costs spend money to run the business.
- Money spent making products or services that are sold to customers.
- Money spent on salaries of employees who run business processes or manage the business resources.
- Money spent to pay bills from suppliers and contractors who are providing goods or services needed to run the day-to-day operation.
- The value of the cost transaction is the amount of the money to be spent. The time attribute for the cost transaction is recorded at the time when money changes hands in a cost-basis company. The time attribute for the cost transaction is recorded at the time when the invoice is received and the liability is incurred in an accrual-basis company.
- Investments spend money with the promise that the result of the spending will provide a specific future value to the company.
- Investments are a gamble by the company. The spending of the investment will consume money now; but there is a promise of benefits to the company in the future. Examples are the investment into new products, new systems, new facilities, or into research.
- Investments are treated differently on the basic financial reports than other costs. The method for how they are treated is explained in those modules.
- Investments are normally analysed in advance to determine if the projected benefit is adequate given the amount of investment money spent.
- Benefits can be new revenue, lower costs, or cost avoidance or future projected costs.
Hints and Tips
- When determining investments, include finance in the discussion since they must record these differently than operational costs.
- Investments are often discretionary – you can defer spending that money and stay in business. Operating costs are mandatory – if you don’t spend them you can’t stay in business and deliver products and services.
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