2.1.1 Internal Finance

Question 1

What are the two methods of finance?

Answer 1

Internal (inside the business) and External (outside the business)

Question 2

What are internal SOURCES of finance?

Answer 2

Owner’s capital: personal savings
Retained profit
Sale of assets
Improved management of working capital

Question 3

What is Owner’s capital?

Answer 3

When an entrepreneur invests their own money in a business e.g. from personal savings.

Owner’s capital shows the proportion of the business’ assets that are owned by the business owner rather than creditors

Question 4

What are Assets?

Answer 4

Assets are items owned by the business e.g. stock is a current assets that will stay in the business for less than a year and vehicles are long term assets

Question 5

What are Creditors?

Answer 5

Creditors are people who the business owes money to e.g. the bank

Question 6

What are benefits of Owners captital?

Answer 6

Do not have to repay
No interest charges
Owner(s) maintain control
Risking own savings can be motivational
Do not have to go through any lengthy application procedures

Question 7

What are drawbacks of Owners capital?

Answer 7

It may only be limited amounts available and be a

threat to personal finances and family

Question 8

What is Retained profit?

Answer 8

Profit kept within a business from profit for the year to help finance future activities

Question 9

What are benefits of Retained profit?

Answer 9

Avoids interest repayments

Does not dilute the business ownership

Question 10

What are drawbacks of Retained profit?

Answer 10

Only an option if sufficient retained profit exists within the business.
May cause shareholder dissatisfaction if this is at the expense of dividend payments.
Reduces the security blanket of keeping retained profits for unforeseen situations or to take advantage of new opportunities.

Question 11

What is the “Sale of assets”?

Answer 11

Sale of assets refers to the sale of a long term or fixed assets
These assets can be sold in order to get an immediate injection of cash in to a business and thereby provide finance

Question 12

What are Long term/Fixed assets?

Answer 12

Fixed assets will stay in the business for more than a year e.g. machinery and vehicles

Question 13

What are Current/Short term assets?

Answer 13

Current assets are items owned that will be held for less than a year

Question 14

What are some benefits of the Sale of assets?

Answer 14

No interest charges or repayments
May be turning an obsolete asset into finance
Immediate lump sum cash injection

Question 15

What are some drawbacks of the Sale of assets?

Answer 15

May be expensive in the long run if need to lease the asset back
Loss of use of the asset and future value
It is only a one off option

Question 16

What is “Improved management of working capital”?

Answer 16

Existing capital is made to stretch further. This can be achieved through the business negotiating to pay its bills later (creditors) or work at getting cash from their customers quicker (debtors)

Question 17

What are benefits of “Improved management of working capital”?

Answer 17

Avoids interest repayments

Does not dilute the business ownership

Question 18

What are Drawbacks of “Improved management of working capital”?

Answer 18

Only an option if sufficient debtors or creditors exist within the business
Reduces the security blanket of improved management of working capital for unforeseen situations or to take advantage of new opportunities
Does not raise any additional cash