2.1.1 internal finance

Question 1

name 4 sources of internal finance

Answer 1

• owners capital
• retained profit
• sale of assets
• improved management of working capital

Question 2

what is owners capital

Answer 2

when an entrepreneur invests their own money into a business e.g. personal savings

Question 3

what are the advantages of owners capital

Answer 3

• don’t have to repay
• no interest charges
• the owner maintains control
• risking your own savings causes motivation
• don’t have to go through a lengthy application process

Question 4

what are the disadvantages of owners capital

Answer 4

• may only be a limited amount available

- threat to personal finances and family

Question 5

what is retained profit

Answer 5

profit which has been kept back from the year before to help finance future activities.

Question 6

what are the advantages of retained profit

Answer 6

• avoids interest repayments

- doesn’t dilute ownership of the business

Question 7

what are the disadvantages of retained profit

Answer 7

• only an option if sufficient profit exists
• may cause shareholder dissatisfaction if its at the expense of their dividend
• reduces security blanket of keeping retained profits for unforeseen situations

Question 8

what is sale of assets

Answer 8

refers to the selling of fixed assets

Question 9

what are the advantages of sale of assets

Answer 9

• no interest charges
• may be turning an obsolete asset into finance
• immediate lump sum cash injection

Question 10

what are the disadvantages of sale of assets

Answer 10

• may be expensive in the long run if you need to lease the asset back
• loss of use of the asset and its future value
• is only a one of option

Question 11

what is improved management of working capital

Answer 11

it is making existing capital stretch further. it can be achieved by the business negotiating to pay its bills later or work at getting the customers to pay quicker

Question 12

what are the advantages of improved management of working capital

Answer 12

• avoids interest repayments

- doesn’t dilute the business ownership

Question 13

what are the disadvantages of improved management of working capital

Answer 13

• only an option if sufficient debtors or creditors exist in the business.
• reduces security blanket for unforeseen situations
• doesn’t raise any additional cash