2.1.1 Sources of Finance

Capital expenditure

Spending on fixed assets

Examples of capital expenditure

Equipment, buildings and vehicles

Revenue expenditure

Spending on raw materials or day to day expenses

Examples of revenue expenditure

Wages or utilities

Internal finance

The raising of capital or cash from within the business, e.g. owner’s capital, personal savings, retained profit.

Personal savings / Owner’s capital

A source of internal finance provided by the owner of a business using their own money.

Advantages of owner’s capital

• No interest payments

• Full control

• Quick to access

Disadvantages of owner’s capital

• Limited funds

• May limit growth if not enough funds

• Risk to personal finances

Retained profit

Profit that is kept by the business and re-invested rather than paid out as dividends.

Advantages of retained profit

• No interest payments

• Full control

• Quick to access

Disadvantages of retained profit

• Limited for new/small businesses

• Leads to slower growth

• Shareholders may want dividends rather than profit being retained

Sale of assets

A type of internal finance involving selling resources that belong to the business.

Advantages of sale of assets

• No interest payments

• Gets rid of obsolete equipment

Disadvantages of sale of assets

• Reduces resources that may become useful later

• Could slow production or limit capacity

• Can take a while to find someone to purchase your equipment