2.1.1 Internal Finance Flashcards
definition of finance
management of investment needed to open, run and expand a business
definition of internal finance
money that comes from within the business
reasons for raising finance
pay debt
help business over slow trading period –> overdraft
expand
start-up
buy stock –> trade credit
internal sources of finance
owners capital, retained profit, sale of assets
owners capital facts
= owners net worth/stake in business
represents the owner’s claim on the assets of the business after liabilities are deducted
owner may used savings or redundancy to pay out start up –> may never take it back out
owners capital appropriate
sole trader, partnership
start, expand, run business day-to-day
retained profit
accumulated profitd year to year
after 1 year or more business some profit that they are able to re-invest into business
+ no interest
- once it is used it is gone and can’t be used elsewhere in business
retained profit appropriate
in a company making large amounts of profit
inappropriate for start-up
inappriapriate for company thar lack working capital
sale of assets
unwanted assets
re-sale value tangiable (physically touched)
business can raise finance by selling items they already own –> assets
e.g. machinery, land, premises, furniture, vehicles
when business sells assets they no longer have benefit of that assets –> business will look less attractive to investors
sale of assets appropriate
all types of businesses
when business is growing it may need to raise cash fast to be able to continue to trade
assets can be sold quickly for cash
+/- retained profit
+ owners keep control
+ no interest
- loss of interest payments if it was left on savings account
- opportunity cost -> not being able to use the money elsewhere
+/- sale of assets
+ quick source of interest
+ in larger bsuinesses sale of assets –> efficacy
- bad perception
- lose benifit ofassets
- may not raise enough money
+/- owners equity
+ don’t have to pay anyone interest in it
+ quick and easy
- too little own money
