24. Internal finance Flashcards
Need for finance
Business need money to buy equipment to get started, raw materials and obtain premises. If the owner wants to expand, extra money may be needed over and above that from sales.
Owner’s capital
In most cases, a business cannot start unless the owners provide capital of their own. A common source is personal savings.
Retained profit
It is the cheapest source of finance with no financial charges, such as interest and administration but there is an opportunity cost as owners cannot receive the profit.
Sale of assets
An established business may be able to sell some unwanted assets to raise finance such as machinary, obsolete stock, land and buildings…
Advantages of internal finance:
- The capital is available immediately, there is no time delay
- Internal finance is cheap, there are no interest payments
- The business will not be subject to credit checks.
- There is no need to involve third parties
Disadvantages of internal finance:
- Internal finance can be limited, a business may not be sufficiently profitable to use retained profit or may not have unwanted assets to sell
- Internal source of finance cannot be subtracted from business profits to reduce tax owed.
- Internal finance can be inflexible compared to external source of finance, there are more option of external finance
- There are no inflationary benefits with internal finance, inflation can reduce the value of debt if external sources are used.
- Opportunity of costs of using internal finance can be high.
capital
money put into the business by the owners
Capital expenditure
Spending on business resources that can be used repeatedly over a period of time
retained profit
profit after tax that is ‘ploughed back’ into the business
revenue expenditure
spending on business resources that have already been consumed or will be very shortly.
Sale and leaseback
The practice of selling assets, such as property or machinery, and leasing them back from the buyer
