2.1) Raising Finance) Internal Finance

Question 1

What is Owner’s Capital?

Answer 1

Owner’s Capital is the Personal Savings invested into the Business by the Owner.

Question 2

Define the term Retained Profit

Answer 2

Retained Profit is a surplus of revenue generated from previous years that is reinvested back into the business rather than paid out to shareholders.

Question 3

Name the 2 main reasons why Finance is needed:

Answer 3

Finance is needed for Capital Expenditure and Revenue Expenditure

Question 4

What is Capital Expenditure?

Answer 4

Capital Expenditure is when money is spent on Fixed Assets such as equipment, buildings, IT, and vehicles.

Question 5

What is Revenue Expenditure?

Answer 5

Revenue Expenditure is when money is spent on Raw Materials or Day-to-Day Expenses such as Wages or Utilities.

Question 6

Name the 2 Sources of Finance:

Answer 6

The 2 Sources of Finance are:

Internal Finance and External Finance

Question 7

What is Internal Finance?

Answer 7

Internal Finance is money that comes from inside the business

Question 8

Name the Sources of Internal Finance:

Answer 8

The Sources of Internal Finance include:

1) Owner’s Capital
2) Retained Profit
3) Sale of Assets

Question 9

Define the term Sale of Assets:

Answer 9

Sale of Assets refer to the selling of Business Assets that are no longer required, such as Equipment or Buildings, to generate a Source of Finance.

Question 10

What is the Opportunity Cost of Retained Profit?

Answer 10

The Opportunity Cost is that Shareholder’s won’t receive extra profits

Question 11

A Sale and Leaseback Arrangement is part of ‘Sale of Assets’

What is a Sale and Leaseback Arrangement?

Answer 11

A Sale and Leaseback Arrangement is made when a business sells an asset to get quick cash and rents it from the new owners at a discount

Question 12

Give an example of a Sale and Leaseback Arrangement:

Answer 12

In 2023, Sainsbury’s sold the Prime Retail Property for £500 million to LXI Reit, which it then leased back.

Question 13

How else can a Business raise Additional Finance Internally?

Answer 13

A Business can raise Additional Finance Internally by managing its Working Capital more effectively.

Question 14

What is Working Capital?

Answer 14

Working Capital is the Money used in the Day-to-Day operations of a business.

Question 15

Give two ways a Business can manage its Working Capital?

Answer 15

Two ways a Business can manage its Working Capital include:

1) Negotiating extended payment terms with Suppliers

2) Encouraging Customers to pay more promptly for Credit Purchases

Question 16

What are the Benefits of Internal Finance?

Answer 16

The Benefits of Internal Finance are that:

1) It is Often Free because it doesn’t involve Interest or Arrangement Fees

2) It doesn’t involve Third Parties who may want to Influence Business Decisions

3) It can be arranged very quickly without significant Bureaucracy

4) It can be accessed more easily for Businesses that fail Credit Checks

Question 17

What are the Negatives of Internal Finance?

Answer 17

The Negatives of Internal Finance are that:

1) It has a significant Opportunity Cost because once the Money has been used, it isn’t available for other purposes.

2) It may be Insufficient for the Business’ needs

3) It isn’t as Tax-Efficient as External Finance, for example Loan Repayments may be treated as a business cost and offset against tax

Question 18

Which type of Internal Finance is commonly used when a Business Starts Up?

Answer 18

Owner’s Capital is a key source of Funds when a Business Starts Up

Question 19

True or False:

Owner’s Capital can only be used when a Business Starts Up?

Answer 19

False.
Owner’s may invest more as the Business Grows, or if there is a Specific Need such as a Short-term Cash Flow Issue.