2.1.1 - Internal Finance

Question 1

Where does internal finance come from?

Answer 1

• Owner’s capital
• Retained profit
• Sale of assets

Question 2

What is capital expenditure?

Answer 2

• Spending on fixed assests

Question 3

What is revenue expenditure?

Answer 3

• Spending on raw materials/wages etc

Question 4

Owners Capital - What is it/ Adv and Dis

Answer 4

• Money the owner invests (usually personal savings)
• Used mostly when starting up
  ADV - Easy to access and no paying back
  DIS - Can be limited amount

Question 5

Retained profit - What is it/ Adv and Dis

Answer 5

• Profit generated from previous years and reinvested
  ADV - No interest/Easily accessible
  DIS - Shareholders may want money as dividends also may miss investment opportunities

Question 6

Sale of assets - What is it/ Adv and Dis

Answer 6

• Sell assets to gain capital
• Not usually for new business as mainly used for spares
  ADV - Cheap source/No interest
  DIS - Can take long time and may need assets in future

Question 7

Benefits of Internal Finance

Answer 7

• Often free w/o interest
• Quickly organised
• Don’t involve third parties who may influence decisions

Question 8

Drawbacks of Internal Finance

Answer 8

• Opportunity cost as once used it could be used for other things
• May not be sufficient for needs