Sources of short-term finance Flashcards
What are internal sources of short-term finance? How can increasing working capital management efficiency be a good source of short-term internal finance?
Funds generated internally by the business in the normal course of operations.
E.g. raise short-term finance through cash improvements gained by reducing or controlling working capital. Can sell assets no longer really needed to free up cash or use internally generated retained earnings.
Includes:
-reducing/controlling working capital
- reducing inventories
- tighter credit control
- delaying payments to suppliers
- sale of redundant assets
- retained profits
Higher level of working capital represents a large commitment of finance and significant opportunity cost in interest. Efficiency savings generated through efficient management of trade receivables, inventory, cash and trade payables can reduce a bank overdraft and interest charges, as well as increase cash reserves that can be re-invested elsewhere in the business.
