2.1.1 Internal Finance

Question 1

Why do business need finance

Answer 1

• capital expenditure = spending on fixed assets such as equipment, buildings, IT equipment and vehicles
• revenue expenditure = spending on raw materials or day-to-day expenses such as wages or utilities

Question 2

Owner’s capital: personal savings

Answer 2

• key source of funds when a businesses starts up
• either their savings or a lump sum e.g. money received from a redundancy payment
• owners may invest more as the business grows or if there is a specific need e.g. a short term cash flow problem

Question 3

Retained profit

Answer 3

• when the profits that have been generated in previous years and not distribute to owners are reinvested back into the business
• this is a cheap source of finance, as it does not involve borrowing and associated interest and arrangement fees
• the opportunity cost of investing money back into the business is that shareholders do not receive extra profit for their investment

Question 4

Sale of assets

Answer 4

• when the business sells assets which are no longer required (e.g. machinery, land, buildings)
• a sale and leaseback arrangement may be made if a business wants to continue to use an asset but needs cash

Question 5

Adv + disadv of using internal finance

Answer 5

Advantages:
- internal finance is often free ( e.g. does not involve the payment of interest or charges)
- it does not involve third parties who may want to influence business decisions
- internal finance can usually be organised very quickly and without significant paperwork
- businesses that may fail credit checks can access internal finance sources more easily