2.1.1 Internal finance

Question 1

What is internal finance?

Answer 1

Internal finance refers to funds generated within the business, often free from external costs and influences.

Internal finance can include personal savings, retained profits, and sales of assets.

Question 2

What are the advantages of internal finance?
and what does it allow?

Answer 2

• Often free
• Does not involve third parties
• Can be organized quickly
• Useful if businesses fail credit checks

Internal finance allows businesses to maintain control over their financial decisions.

Question 3

What are potential sources of internal finance?

Answer 3

• Personal savings
• Retained profit
• Sale of assets

Each source has its own implications and costs.

Question 4

What is a significant drawback of selling assets for internal finance?

Answer 4

Significant opportunity cost.

e.g. once retained profit has been used, it is not available for other purposes

Question 5

True or False: Internal finance is always sufficient for a business’s needs.

Answer 5

False.

Internal finance may not always meet the financial requirements of a business.

Question 6

Fill in the blank: Internal finance is rarely as _______.

and why?

Answer 6

tax efficient
.e.g. loan repayments may be treated as a business cost and offset against tax

Tax efficiency can vary depending on the source of finance used.