3.2.1 Internal sources of finance

Question 1

Name the three forms of internal finance

Answer 1

• Owners’ equity
• retained profits
• sales of assets

Question 2

What is Owners’ equity?

Answer 2

These are funs invested into the business by the owners. For Sole traders or partnerships, they will be the owners’ personal savings and for companies, they will come from the issuing of shares for part ownership of the company. For public companies share issues through IPOs are the main source of equity funding.

Question 3

What are retained profits?

Answer 3

Retained profits are that part of the net profit of a business that is not paid out in dividends to shareholders. Instead, these funds are invested back into the business. As retained profits are funds that are withheld from shareholders, retained profits are an indirect method of investment from these shareholders. This delayed return is essential if a business is to improve long-term growth and return on capital.

Question 4

What are Sales of assets?

Answer 4

Another way that owners’ equity can be used to finance business projects is through the sales of assets such as buildings, plant and equipment. After a takeover or merger, the new equity may have surplus assets due to duplication of resources. These surplus assets can be sold and allow funding of new projects to meet the goals and objectives of the new combined business entity.