Sources of Finance: Retained Profits

What are long term finances?

Finances the whole business over many years

What are examples of long term sources of finance?

• Share capital

• Retained profits

• Venture capital

• Mortgages

• Long-term bank loans

What are medium term sources of finance?

Finances major projects or assets with a long life

What are examples of medium term sources of finance?

• Bank loans

• Leasing

• Hire purchase

• Government grants

What are short term finances?

Finances day-to-day trading of the business

What are examples of short term sources of finance?

• Bank Overdraft

• Trade creditors

• Factoring

What are internal sources of finance?

• Retained profits

• Working capital

• Asset disposals

What are external sources?

• Share capital

• Bank loan/overdraft

• Debentures

• Venture capital

• Suppliers

How are profits a source of finance?

• A retailer buys a stock of vinyl records for £100

• During the next month, it sells this stock for £300 cash, making a profit of £200

• The cash profit of £200 is then reinvested in £100 of new stock and the balance of £100 is used to pay shop wages

What are the key features of retained profits?

• Earned from profitable trading

• Can either be kept in business or paid out as dividends

• Highly flexible- shareholders in control

• Not zero-cost because of opportunity costs

What are the benefits of retained profits?

• Flexibility

• Business owners in control

• Low cost

• Can be substantial

What are the drawbacks of retained profits?

• A drain on finance if loss-making

• The danger of hoarding profits

• The opportunity cost for shareholders