BS24. Internal Finance

Why does a business need finance?

- Businesses need finance to start up, buy equipment, and obtain premises

- After initial expenditure, sales revenue covers ongoing expenses like raw materials and debts

- However, expansion requires finance for larger premises, more equipment, and extra workers

- So raising finance is essential for continuous growth and sustainability

What is capital expenditure?

Long-term spending on fixed assets used repeatedly to generate revenue, such as machinery, vehicles, or property

What is revenue expenditure?

Short-term spending on goods and services that support daily operations, such as wages, raw materials, fuel, and maintenance

What is owners capital?

- Money invested from the owner's personal savings that may be used at any stage

- A key risk that demonstrates entrepreneurial commitment

- Common in sole traders, partnerships, and small companies

What is internal finance?

Finance generated from within the business, including owner's capital, retained profit, and asset sales

What is retained profit?

- Profit kept after tax to reinvest in the business

- Interest-free and flexible with no repayment obligations

- Has opportunity cost, as profits are not paid out to shareholders as dividends

What is a sale and leaseback agreement?

- Selling a fixed asset (building or machinery) to a specialist firm and leasing it back

- Provides instant liquidity and transfers maintenance responsibility

- Retains asset use while improving cash flow

What is sale of assets?

Selling fixed or non-essential assets to raise finance; large firms may sell subsidiaries or underused capital assets

What are the advantages of internal finance?

- Capital is instantly accessible via retained profit or quick asset sales

- Cost-effective with no interest or fees

- Simple process with no third-party involvement like credit checks

What are the disadvantages of internal finance?

- Limited availability due to insufficient profitability or lack of unwanted assets

- Cannot reduce taxable profits as it is not a deductible business cost

- Inflexible compared to external finance with more funding options

- No inflationary benefits as inflation does not reduce debt value

- High opportunity costs as using retained profit makes it unavailable for other purposes