Internal Sources of Finance

Define internal source of finance.

Internal sources are sources of money from within the business, from the owner, or from previous business income (earned through profit).

Give examples of internal sources of finance.

1. Retained profit
2. Owner's savings
3. Sales of Assets
4. Running down stocks

What is retained profit?

Capital kept by a business from profit made previously. Owners would have taken their share of the profit as well.

What are the advantages of financing a business using retained profit?

No interest will be payable and no future repayments. This will lead to lower running cost and therefore improved cash-flow.

What are the disadvantages of financing a business using retained profit?

- Usually businesses have small amounts of retained profit in relation to what they need. This could lead to the business still needed external sources of finance and therefore additional costs such as interest payments.
- It is also not available for new businesses.

What is owner's savings?

Money that is put into the business from the private savings of the owners.

What are the advantages of financing a business using owner's savings?

As with retained profit, no interest is payable.

What are the disadvantages of financing a business using owner's savings?

Similar to retained profit, capital may be limited to small amounts, which may mean that external sources of finance are still required.

What is sales of assets?

When an established or large business sells goods that it no longer requires, such as equipment, machinery or vehicles. The business can then reinvest this money in other ways.

What are the advantages of financing a business using sales of assets?

Once the assets are sold, the money is instantly available to be used. This is suitable for large businesses as they are likely to have old assets that may need to be replaced or renewed.

What are the disadvantages of financing a business using sales of assets?

- It can take a long time to access money because it can be difficult to sell assets. This may lead to missed business opportunities.
- Small businesses are unlikely to have assets to sell because they may need all of their assets or wish to pursue growth.

What is running down stocks?

Selling existing stock instead of buying new stock. Money saved from delaying order of new stock can be used elsewhere in the business.

What are the advantages of financing a business through running down stocks?

It reduces opportunity costs and storage costs of high stock levels.

What are the disadvantages of financing a business through running down stocks?

Must be done carefully to avoid disappointing customers if they have to wait to receive their purchase.