Internal finance 2.1.1

Question 1

Why is finance required?

Answer 1

• For a business to get started, allow them to grow and fund continuing activity
• Capital expenditure - spending on fixed assets
• Revenue expenditure - spending on day-to-day expenses

Question 2

Owner’s capital

Answer 2

• Personal savings are a key source of fund when a business starts up
• Owners may invest more as the business grows or if there is a specific need

Question 3

Retained profit

Answer 3

• Profit that has been generated in previous years and not distributed to owners is reinvested back into the business
• Cheap source of finance as it does not involve borrowing

Question 4

Sale of assets

Answer 4

• Selling assets that are no longer required
• Sale and leaseback arrangement may be made if a business wants to continue to use an asset but needs cash

Question 5

Advantages of internal finance

Answer 5

• Often free - no interest
• Does not involve third parties who may want to influence business decisions
• Organised quickly and without significant paperwork
• Business that may not qualify for bank loan can access finance

Question 6

Disadvantages of internal finance

Answer 6

• Significant oppurtunity cost
• May not be sufficient
• Newer businesses will not have retained earnings/ spare assets