Scribd
Upload
2 views12 pages

Presentation - Internal Sources of Business Finance

Uploaded by

sarah

Copyright:

© All Rights Reserved
Download as PDF, TXT or read online from Scribd
Download as pdf or txt

Presentation - Internal Sources of Business Finance

Uploaded by

sarah
2 views12 pages

Copyright

© © All Rights Reserved

Available Formats

PDF, TXT or read online from Scribd

Did you find this document useful?

Is this content inappropriate?

Copyright:

© All Rights Reserved
Download as PDF, TXT or read online from Scribd
Download as pdf or txt
2 views12 pages

Presentation - Internal Sources of Business Finance

Uploaded by

sarah

Copyright:

© All Rights Reserved
Download as PDF, TXT or read online from Scribd
Download as pdf or txt
You are on page 1/ 12

Internal Sources

of Business
Finance

ASL 12 Business Studies


Why do businesses need finance?

Capital • Spending on items that will be continually used


• Examples?
Expenditure • Vehicles, machinery, property

Revenue • Payments for goods and services that have already been
consumed or will be very soon

Expenditure • Examples?
• Wages, raw materials, fuel, maintenance and repairs
Internal Finance:

• Generated within the


Internal vs. business.
• Does not increase debts.
External
Finance External Finance:

• Sourced from outside entities.


• Creates debt.
• Money provided by the business
owner:
• During business initiation and
operation.
Owners • Sourced from personal savings or
Capital redundancy payments.
• Some profits = tax (corporation tax)
• Some paid out to the owners or
shareholders (dividends).

Retained • Remaining profit is kept (retained) in


the business and becomes a source of
Profit finance for future activities.
• Profits reinvested into the business
• Not paid to shareholders (therefore
= permanent source of finance)
• Liquid form = significant source for
expansion
• Disadvantage:
• Not available for newly formed or
unprofitable businesses.
• Selling of under-utilised assets
• Raise liquid cash.
• Sales-Leaseback agreement:
Sale of • Selling assets the business still
intends to use but do not need to
Assets own.
• Assets sold to a leasing specialist
and leased back by the company.
• Advantage:
• Increases liquidity (cash
injection)
• Disadvantage:
• Additional fixed cost in the
leasing and rental payment.
• Capital is available immediately (no time
delay between identifying the need for
finance and obtaining it)
• Ie. retained profit – available; assets sold
Advantages quickly
• Cheap – no interest payments = business
of Internal costs lower and profits higher
Finance • Doesn't increase liabilities or debts.
• No loss of control for original owners.
• Business not subject to credit checks (no
need to involve third parties)
• Not all businesses are sufficiently
profitable (retained profit)
• Not all businesses have assets to sell
• Owners may not have personal resources
Disadvantages • Limited funding options
of Internal • High opportunity cost (shareholders may
Finance not be happy with retained profit – lowers
dividend amount)
• Can limit growth pace.
• Rapidly expanding firms often need external
sources.
Do not make the mistake of
suggesting that selling shares is a
form of internal finance for
companies. Although the
Key Tip shareholders ‘own’ the business,
the company is a separate legal
unit and, therefore, the
shareholders are ‘outside’ it
(incorporated businesses)
• When answering questions on internal
sources of finance, remember to consider
carefully the financial circumstances of
the case in question. The sources and
methods of finance used by a business
will depend significantly on the nature of
EXAM HINT – the business and its financial position:
• Smaller businesses forced to use
Application internal sources of finance (too risky to
external providers)
• Limited companies = wider range to
choose from (more secure, large
quantities of collateral (assets that a
business owner promises to hand over
to a lender if they fail to repay the loan)
Key Terms
• Capital: Money out into the business by the owners
• Capital expenditure: Spending in business resources
that can be used repeatedly over a period of time
• Internal Finance: Money generated by the business of its
current owners
• Retained Profit: Profit after tax that is ploughed back into
the business
• Revenue Expenditure: Spending on business resources
that have already been consumed or will be very shorty
• Sale and Leaseback: The practice of selling assets, such
as property or machinery, and leasing them back from the
buyer
Activity
Exam Prac: 8 marker and 20 marker

You might also like