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Internal Sources of Finance

Retained profits, sale of unused assets, and reducing working capital are the three main internal sources of finance for businesses. Retained profits are profits kept in the business after taxes and dividends to reinvest. Established businesses can also raise funds by selling unused assets or leasing them back. Additionally, excess working capital held as stock, cash, or in debtors can be reduced to free up funds by lowering stock levels, selling more on credit terms, or pushing debtors to pay earlier. However, internal financing is not available to all companies and may slow rapid business growth, so external sources are also needed.

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58 views1 page

Internal Sources of Finance

Retained profits, sale of unused assets, and reducing working capital are the three main internal sources of finance for businesses. Retained profits are profits kept in the business after taxes and dividends to reinvest. Established businesses can also raise funds by selling unused assets or leasing them back. Additionally, excess working capital held as stock, cash, or in debtors can be reduced to free up funds by lowering stock levels, selling more on credit terms, or pushing debtors to pay earlier. However, internal financing is not available to all companies and may slow rapid business growth, so external sources are also needed.

Uploaded by

abrar mahir Sahil
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Internal sources of finance

 Profits retained in the business:


o This refers to the after tax and dividend profit retained with the business.
o This profit can be ploughed back to the business as a source of finance. Any
profitable business will use this as a major internal source of finance
o However, for businesses running at a loss or newly formed businesses cannot
use this finance.
o Also too much retained profit can annoy the shareholders, as fewer dividends
will be paid out.

 Sale of assets:
o Established businesses can sell their unused assets to raise the finance
o They can also lease back the asset if they need to use the asset but do not
require owning it.

 Reduction in working capital


o Excess working capital can be used to finance business activities
o A firm can reduce its working capital level and release some finance. It can do so
by
 Keeping less stock (risky if demand rises)
 Selling more on cash than credit (customers may look for other
suppliers with higher credit terms)
 Pressuring debtors for early payments (debtors can get annoyed and
look for alternative suppliers)

Evaluation:
 Internal sources of finance:
o Has no direct cost to the business
o Does not increase the liability or debts of the business as no loans are taken
o No risk of losing control of business as no shares are sold
 However
o Not available for all companies
 Newly formed
 Unprofitable ones
 With fewer assets
o Also only internal finance will slow the growth rate of the business
Thus rapidly expanding businesses need to depend on the external source of finance too.

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