2.1.1 Internal Finance Flashcards
Describe owners capital
- When an entrepreneur invests their own money in a business e.g. from personal savings
- Owner’s capital is how much the owner has invested in the business
- Owner’s capital shows the proportion of the business’ assets that are owned by the business owner rather than creditors
What is a creditor
Someone you owe money to
What is a debtor
People owe money to you
Advantages of owners capital
- Do not have to repay
- No interest charges
- Owner(s) maintain control
- Risking own savings can be motivational
- Do not have to go through any lengthy application procedures
Disadvantages Of owners capital
- May only be limited amounts available
* Threat to personal finances and family
Describe retained profit
•Profit kept within a business from profit for the year to help finance future activities
Advantages of retained profit
●Avoids interest repayments
●Does not dilute the business ownership
Disadvantages of retained profit
●Only an option if sufficient retained profit exists within the business
●May cause shareholder dissatisfaction if this is at the expense of dividend payments
●Reduces the security blanket of keeping retained profits for unforeseen situations or to take advantage of new opportunities
Describe sales of assets
- Sale of assets refers more to the sale of a long term or fixed assets
- Fixed assets will stay in the business for more than a year e.g. machinery and vehicles
- These assets can be sold in order to get an immediate injection of cash in to a business and thereby provide finance
Advantages of sales of assets
- No interest charges or repayments
- May be turning an obsolete asset into finance
- Immediate lump sum cash injection
Disadvantages of sales of assets
- May be expensive in the long run if need to lease the asset back
- Loss of use of the asset and future value
- Is only a one off option
Describe improved management of working capital
•Existing capital is made to stretch further. This can be achieved through the business negotiating to pay its bills later (creditors) or work at getting cash from their customers quicker (debtors).
Advantages of improved management of working capital
●Avoids interest repayments
●Does not dilute the business ownership
Disadvantages of improved management of working capital
●Only an option if sufficient debtors or creditors exist within the business
●Reduces the security blanket of improved management of working capital for unforeseen situations or to take advantage of new opportunities
●Does not raise any additional cash
What is internal finance
Capital raised from within the business
