Internal Finance Flashcards
What is owner’s capital?
Owners provide capital from their own personal resources like savings.
-New, start-ups and established businesses trying to grow.
What is retained profit?
-When a business uses profits from previous years to invest.
-Long term, internal finance, normally established
What are advantages of retained profit?
-Cheapest with no interest or administration costs.
-Flexible source and does not have to be used immediately. Can be accumulated in a bank where it will gain interest.
-Low risk approach
What are disadvantages of retained profit?
-Opportunity cost: Less dividends for shareholders or less money to pay back to family friends, both causing conflict.
-If the business doesn’t make a profit then retained profit will not be possible as a source of finance.
What is sale of assets?
An established business may be able to sell some unwanted assets to raise finance. (Obsolete stock, land, machinery). Large companies can sell parts of their organisation to raise finance.
What is a sale and leaseback agreement?
Selling an asset, such as property or machinery that the business still actually needs. The sale is made to a specialist company that leases the asset back to the seller.
What is an advantage of sale of assets?
-Instant cash is generated.
-The responsibility for the maintenance and upkeep of the asset passes to the new owner.
-No interest needed to be paid
-No control given up
What are disadvantages of sale of assets?
-Only a finite amount of assets to sell as there won’t be a lot of surplus resources/assets.
-Risk- If you can’t find a buyer, not a ‘fair value’ for the fixed asset and it is very likely that it will be depreciated.
What are pros of owner’s capital?
-No financial cost
-Easiest and quickest
What are cons of owner’s capital?
-Likely to be limited
-If they don’t make instant profit then there is financial pressure
-Cost of well-being (opportunity cost)
