Chapter 26- Internal Finance

Question 1

Capital expenditure

Answer 1

spending on business resources that can be used repeatedly over a period of time

Question 2

Revenue expenditure

Answer 2

spending on business resources that have already been consumed

Question 3

Capital

Answer 3

The money provided by the owners of a business

Question 4

Internal Finance

Answer 4

Money generated by the business or its current owners

• Owners provide capital from their own personal recourses – A
  common source is personal savings – some entrepreneurs have
  deliberately saved up over a period of time so that they can start
  their own business – sometimes, people who have lost their jobs
  may decide to go into business using their redundancy payments
• These sources are personal and can be used by sole traders and
  partnerships
• Owners of limited companies have to provide their own capital

Question 5

Retained profit

Answer 5

Profit after tax that is ploughed back into the business
- Single most important source of finance for a business
- Much of all business funding comes from retained profit
- It is the cheapest source of finance, with no financial charges such
as interest and administration
- If retained profit is used by the business it cannot be returned to the
owners
- For a small business this might mean that owners and their families
have less money to fund their lifestyle
- It is a flexible source of finance and does not have to be used
immediately

Question 6

Sale and leaseback

Answer 6

selling an asset and then leasing (renting) them back from the buyer
- For example, machinery, obsolete stock, land etc.
- Leaseback is an option in which the sale is made to a specialist
company that leases the asset back to the seller – an increasingly
popular source of finance

Question 7

Sources of internal finance

Answer 7

Owners Capital, Retained Profit, Sale of assets

Question 8

Advantages of internal finance

Answer 8

1. Capital Available immediately – no time delay between identifying a
   need for finance and obtaining it
2. Cheap- there is no interest or admin charges – there are no interest
   payments, which means that the costs will be lower and profit will be
   higher
3. Business not subject to credit checks

Question 9

Disadvantages of internal finance

Answer 9

1. Can be limited- a business may not be sufficiently profitable to use
   retained profit or may not have unwanted assets to sell
2. Internal finance gets taxed but external doesn’t
3. Less options for internal finance and less flexible (there is a wide
   variety of funding options for external finance)
4. Can result in conflict e.g. shareholders want dividends