Sources of Finance: Retained Profits

Long-term:

• Finances the whole business over many years

  • Share capital

  • Retained profits

  • Venture capital

  • Mortgages

  • Long-term bank loans

Medium-term:

• Finances major projects or assets with a long life:

  • Bank loans

  • Leasing

  • Hire purchase

  • Government grants

Short-term:

• Finances day-to-day trading of the business

  • Bank Overdraft

  • Trade creditors

  • Factoring

Internal Sources:

• Retained profits

• Working capital

• Asset disposals

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

Retained Profits: key features:

• 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

Retained Profits: benefits:

• Flexibility

• Business owners in control

• Low cost

• Can be substantial

Retained Profits: drawbacks:

• A drain on finance if loss-making

• The danger of hoarding profits

• The opportunity cost for shareholders