2.1) Raising Finance) Internal Finance Flashcards
What is Owner’s Capital?
Owner’s Capital is the Personal Savings invested into the Business by the Owner.
Define the term Retained Profit
Retained Profit is a surplus of revenue generated from previous years that is reinvested back into the business rather than paid out to shareholders.
Name the 2 main reasons why Finance is needed:
Finance is needed for Capital Expenditure and Revenue Expenditure
What is Capital Expenditure?
Capital Expenditure is when money is spent on Fixed Assets such as equipment, buildings, IT, and vehicles.
What is Revenue Expenditure?
Revenue Expenditure is when money is spent on Raw Materials or Day-to-Day Expenses such as Wages or Utilities.
Name the 2 Sources of Finance:
The 2 Sources of Finance are:
Internal Finance and External Finance
What is Internal Finance?
Internal Finance is money that comes from inside the business
Name the Sources of Internal Finance:
The Sources of Internal Finance include:
1) Owner’s Capital
2) Retained Profit
3) Sale of Assets
Define the term Sale of Assets:
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.
What is the Opportunity Cost of Retained Profit?
The Opportunity Cost is that Shareholder’s won’t receive extra profits
A Sale and Leaseback Arrangement is part of ‘Sale of Assets’
What is a Sale and Leaseback Arrangement?
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
Give an example of a Sale and Leaseback Arrangement:
In 2023, Sainsbury’s sold the Prime Retail Property for £500 million to LXI Reit, which it then leased back.
How else can a Business raise Additional Finance Internally?
A Business can raise Additional Finance Internally by managing its Working Capital more effectively.
What is Working Capital?
Working Capital is the Money used in the Day-to-Day operations of a business.
Give two ways a Business can manage its Working Capital?
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
What are the Benefits of Internal Finance?
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
What are the Negatives of Internal Finance?
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
Which type of Internal Finance is commonly used when a Business Starts Up?
Owner’s Capital is a key source of Funds when a Business Starts Up
True or False:
Owner’s Capital can only be used when a Business Starts Up?
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.
