Internal finance

Question 1

Define retained profit

Answer 1

Previously earned profit after tax that is ‘ploughed back’ into the business.

Question 2

benefits of retained profit

Answer 2

• Cheap source of finance ​
• Does not have to be used immediately

Question 3

Drawbacks of Retained Profit

Answer 3

Shareholders may wish to receive back form of a dividend​

Retained profit used by the business cannot be returned to the owner

Question 4

what is meant by Sale of assets

Answer 4

When a person or business sells assets it owns, such as equipment or vehicles it no longer uses, in order to raise finance.

Question 5

benefits of Sale of assets

Answer 5

• Able to sell unwanted assets ​
• Instant cash is generated for seller

Question 6

Drawbacks of Sales assets

Answer 6

Business loses the benefit of the asset

Question 7

owners’ capital

Answer 7

Capital provided by the current owner of a business, maybe from savings or redundancy.

Question 8

Benefits of owners’ capital

Answer 8

• Owner can introduce fresh capital in the future ​
• Source of finance that doesn’t incur interest

Question 9

Drawbacks of owners’ Capital

Answer 9

Personal savings can be lost when setting up a business

Question 10

Benefits of internal Finance

Answer 10

• Capital is available immediately ​
• Internal finance is cheap ​
• Business will not be subject to credit ​
• No need to involve third parties

Question 11

Drawbacks of internal finance

Answer 11

• Internal finance can be limited ​
• No inflationary benefits ​
• Opportunity cost of using internal source of finance can be hig