2.1.1 - Internal Finance

Question 1

What are 4 reasons for raising finance?

Answer 1

• to PAY DEBTS
• to help a business over a slow trading period - overdraft
• to EXPAND
• to BUY STOCK

Question 2

What are 3 Methods of Internal Finance?

Answer 2

1) Owners Capital
2) Retained Profit
3) Sale of Assets

Question 3

What is Owners Capital?

Answer 3

SAVINGS MONEY ; sole traders and partnerships would be the 2 business forms mostly use it to expand and grow

Question 4

What are 2 Advantages of Owners Capital?

Answer 4

• NO INTEREST rates to pay
• no complex paperwork and no security needed

Question 5

What are 2 Disadvantages of Owners Capital?

Answer 5

• OWNER MAY NOT HAVE the CAPITAL to put into the business and may still need to borrow
• It’s a RISK that could LEAD to BUSINESS FAILURE

Question 6

What’s Retained Profit?

Answer 6

An accumulation of profit that’s AFTER TAX that’s PUT BACK into the BUSINESS and not retuned to owners
Should be used for more LONG TERM projects compared to short term.

Question 7

What’s 3 Advantages of Retained Profit?

Answer 7

• NO INTEREST payments
• Owners keep control
• EASY ACCESS to finance

Question 8

What’s a Disadvantage of Retained Profit?

Answer 8

• OPPORTUNITY COST of not being able to use the retained profits elsewhere in the business.

Question 9

What’s Sale of assets?

Answer 9

Anything of value the business owns
Should be obsolete assets sold - those not in use
When a business is growing it may need to raise cash fast to be able to continue to trade

Question 10

What’s 2 Advantages of Sale of assets?

Answer 10

• NO INTEREST payments
• STRAIGHTFORWARD SALE , can take place on platforms like ebay

Question 11

What’s 1 Disadvantage of Sale of Assets?

Answer 11

• Once the business has sold the ASSET they LOSE the BENEFIT of it