Internal Sources Of Finance

Question 1

What is meant by internal finance ?

Answer 1

Internal finance - money that is available to fund expenditure from within the business

Question 2

What are the 3 sources of internal finance

Answer 2

-retained profit
-net current assets
-sale of assets

Question 3

What is retained profit ?

Answer 3

Retained profit - some of the predict is kept within the business and not distributed to the owners or shareholders , the money is retained for reinvestment into the business

Question 4

What are net current assets ?

Answer 4

Net current assets - this is money that is immediately available to the business eg cash which can be used to cover day to day expenditure , it also includes assets that can be quickly turned into cash , such as invoices that are due for payment

Question 5

What are sale of assets ?

Answer 5

Sale of assets - vehicles , buildings , machinery and equipment which can be sold to give the business cash , it may take time to sell assets and sometimes the amount revived can be lower than their actual value

Question 6

What are advantages of retained profit ?

Answer 6

-doesn’t have to be repaid and no interest is payable
-available immediately
-no loss of ownership (control)

Question 7

What are disadvantages of retained profit ?

Answer 7

-not available to new businesses and many companies may not have sufficient funds so amount available may be limited
-reduced payments to shareholders causing dissatisfaction
-once used its not availed for alternative purposes

Question 8

What are advantages of net current assets ?

Answer 8

-a quick way of raising money , selling off inventory reduces the costs related to holding it
-means the business has good liquidity

Question 9

What are disadvantages of net current assets ?

Answer 9

-an put pressure on customers as shorter credit terms may be offered
-lower stock holdings can affect the firms ability to meet demand

Question 10

What are advantages of sale of assets ?

Answer 10

-a good way of raising money from assets that ate not needed any longer
-reduces capital tied up in assets

Question 11

What are disadvantages of sale of assets ?

Answer 11

-not all businesses have surpluses assets that they can sell
-may be a slow method of raising funds as some assets take time to sell

Question 12

What is the formula for net current assets ?

Answer 12

Net current assets = current assets - current liabilities