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An outlay cost is the sum of money that an individual or entity spends on a particular project. Total cost consists of both outlay cost and opportunity cost combined. The former describes various types of direct expenses while the latter consists of indirect financial losses that an individual or entity may incur as a result of embarking on a particular project.
In many instances, an outlay cost is an upfront expense that is incurred at the start of a project. When someone finances the purchase of a new home, the lender will typically require the homebuyer to make a principal payment known as a deposit at the time of purchase. This payment is an example of an upfront outlay cost. When cash savings are used to make a purchase, accounting laws in many countries require the buyer to record the transaction as a capital outlay.
Aside from upfront payments, outlay costs can be recorded in accounting books even if that outlay has yet to occur. When a purchase is financed, the ongoing principal and interest payments that the purchaser pays to the lender are an example of an outlay cost. Depending on regional accounting laws, a borrower may have to list anticipated financing costs as liabilities in a general accounting ledger even if those costs are to be divided up over a number of years.
In addition to purchase payments, outlay costs can also include repair and maintenance costs. When a business purchases a photocopying machine, the upfront outlay covers the cost of buying the machine but the machine may not work properly unless the business hires a contractor to maintain the machine. The contractor's fee and the replacement parts are outlay costs that are incurred as a result of the firm purchasing the machine. Additionally, a photocopier will not function without ink and paper which means that the cost of buying these materials is another example of an outlay expense.
Any expenses that cannot be classified as outlay costs are normally recorded as opportunity costs. When a business owner decides to buy a photocopier so that company announcements can be printed out and given to employees then aside from incurring the obvious outlay cost the business owner may have also incurred an opportunity cost. If the business owner had opted to buy an email software program so that notices could be sent electronically rather than printed on paper then the company would have avoided the long-term cost of buying paper and ink. Therefore, outlay costs are tangible expenses while operational costs usually involve lost opportunities to generate revenue or cut costs.
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