Theme 2.1.1: Internal Finance

Question 1

What costs do businesses need to raise finance for?

Answer 1

. Start up costs e.g buying an office or a factory
. Day-to-day expenses e.g electric, heating etc, also known as working capital.
. Depreciation i.e the cost of repairing things like machinery, buildings and so on.
. Expansion such as offices or factories in a new area or even country

Question 2

Internal Finance

Answer 2

Finance that comes from inside the business

Question 3

Examples of internal finance

Answer 3

. Owners capital / personal savings
. Retained profit
. Sale of assets such as vehicles

Question 4

Working Capital

Answer 4

The cash needed for everyday business activities such as the wages and production costs.

Question 5

Advantages of internal finance

Answer 5

. Doesn’t need to be re-payed
. Good for starting a small business
. No interest charges - Cheaper

Question 6

Disadvantages of internal finance

Answer 6

. Owner risks loosing everything
. May not be enough to meet needs
. Harder for smaller businesses to get sufficient retained profit and they probably wont have any assets to sell

Question 7

Owner’s capital evaluation

Answer 7

Good because:
. Does not have to be repaid
. No interest
Bad because:
. Owner risks losing everything

Question 8

Retained Profit Evaluation

Answer 8

Good because:
. Already belongs to the business 
. No repayments
. No interest
. Allows for organic growth and expansion
Bad because:
. May not be enough
. Cannot be used for new businesses

Question 9

Sale of Assets Evaluation

Answer 9

Good because:
. No repayment
. No interest 
. Quickly raises finance
Bad because:
. Loss of resources
. Can not be used by new businesses