2.1.1 Internal Finance Flashcards
Definition of finance
The management of the investment needed to; open, run and grow a business
Definition of internal finance
Investment that comes from within a business
What are the reasons for raising finance?
- to pay debts
- help a business over a slow trading period - overdraft
- to expand : business may apply for long term finance (loan)
- to buy stock
What does owners capital show?
Shows the stake that the owner has in the business
Represents the net assets of the company - if all debts were paid how much would be owed to the owner
When is owner’s capital appropriate?
Sole traders and partnerships would use owner’s capital to expand and grow
What is the advantage of retained profit?
There is no interest to pay
What is the disadvantage of retained profit?
Once it is used, it’s gone and cannot be used elsewhere in the business
Why is retained profit not always appropriate?
If a business is in its first year of trading, it will not have any retained profit - as it won’t have made any to retain.
If a business has not been profitable, there will not be any retained profit to spend.
How can a business raise finance?
Sale of assets such as:
- machinery
- land
- premises
- vehicles
When is the sale of assets appropriate?
When a business is growing it may need to raise cash fast to be able to continue to trade
Advantages of selling assets
- improves efficiency + increase capacity utilisation
- get rid of unused machinery
- helps clear business debts
Disadvantages of selling assets
- may not raise enough for growth/expansion
- may draw in Qs how well business is ran
- a new start up would be in a lot of trouble if they needed to sell their assets
