2.1.1 Raising Finance Flashcards
Examples of internal finance
Internal finance comes from the owner’s capital (personal savings), retained profit, or the sale of assets
What is retained profit
The profit that has been generated in previous years and not distributed to owners is reinvested back into the business.
Advantages of retained profit
No debt – By using this source of finance it means that the business may not have to use loan capital. As a result of this, no interest has to be paid.
Flexible – The amount of retained profit used to invest in the business is chosen by the owner.
Retain control – Owners are able to raise finance without having to dilute some of the power that they have in the business.
Disadvantage of retained profit
Slow process – It can take a long time for a business to gain enough profit that is substantial enough in order to reinvest in the business.
Limited profits – Most businesses are unlikely to have the retained profit required in order to fund big investments in their business e.g. expansion.
Reduce dividends for shareholders – By using retained profits to reinvest in the business it means that there will be less profit left to give to shareholders.
Advantage of sell of assets
Assets depreciate in value – By selling assets as a source of finance it means that the business will be able to get the money from the assets before they depreciates in price.
Poor quality assets can be sold to buy better quality assets – Selling some of the business’s assets could be used in order in order to buy other assets that are of better quality e.g. newer machinery.
Disadvantage of sell of assets
Lose benefit from the asset – By selling the asset it means that the business can no longer benefit from the function of the asset.
Asset no longer on the balance sheet – By selling business’s assets it will result in a reduction in the value of the non-current assets that a business has such as machinery. As a result of this, the value of a business’s total assets will be reduced and therefore the overall valuation of the business will be reduced also.
Advantage of owners capital
No debt – By using owner’s capital as a source of finance it means that the business does not have to take out any loans.
Quick – No approval is needed in order to use owner’s capital to invest in the business.
