2- Internal Finance Flashcards
What is internal finance?
Money raised from within the business
What are the advantages of internal finance
Capital is available immediately
Cheap - no interest payments
Not subject to credit checks
No need to involve third parties
What are the disadvantages of internal finance ?
Can be limited - eg. May not have unwanted assets to sell
Internal sources of finance cannot be subtracted from business debts to reduce tax owed
Can be inflexible compared to external sources
What are the 3 types of internal finance
Owners capital
Retained profit
Sale of assets
What is owners capital?
Money provided by the owners of a business
Capital is part of the risk taken by entrepreneurs when setting up a business
What are the advantages of owners capital?
No interest charges = no increase to business debts
Easy to access - therefore should be available immediately
What are the disadvantages of owners capital?
Savings may be too low - therefore increases risk taken by owners
What is retained profit?
Profit left over after paying tax and dividends to shareholders
OR
Profit after tax that is put into business and not returned to owners
What are the advantages of retained profit?
CHEAPEST source of finance - therefore no financial charges like interest or administration costs
FLEXIBLE source of finance - can be collected gradually by business and put into a back account where it will earn interest
What are the disadvantages of retained profit?
Opportunity cost
If business does not make a profit retained profit will not be a possible source of finance. Or at least too low for expansion
What is sale of assets?
An established business selling unwanted assets to raise finance (can also be done through a sale and leaseback agreement)
What are the advantages of sale of assets?
Cash is generated for seller
Repair and maintenance of asset passes to new owner
What are the disadvantages of sale of assets ?
Takes time to sell the asset
May be sold for less than its value
What is sale and leaseback?
The practice of selling an asset then leasing (renting) it back from owner
What is an opportunity cost?
value of the next-best alternative when a decision is made
