Chapter 24: Internal finance

Capital expenditure

Spending on business resources ➡ can be used repeatedly ➡ over a period of time

Revenue expenditure

Spending on business resources ➡ have already been consumed/will be very shortly

Capital

Money put into the business by owners

Internal finance

Raising of capital from within the business

Types of internal finance

1. Owner’s capital

2. Retained profit

3. Sale of assets

Sale and leaseback

Practice of selling assets ➡ property/machinery ➡ leasing them back from buyer

Advantages of internal finance

• Capital available immediately

• No interest payments ➡ lower costs ➡ higher profit

• Business not subjected to credit checks

• No need to involve third parties

Disadvantages of internal finance

• Can be limited ➡ business no sufficiently profitable to use retained profit ➡ may not have unwanted assets to sell

• Inflexible compared to external sources

• Opportunity cost can be quite high

Owner’s capital

Source of internal finance ➡ provided by owner of a business ➡ personal money from the owner

Retained profit

Profit re-invested back into/kept by business ➡ not paid as a dividend

Sale of assets

Selling resources that belong to the business